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GDP Explained: What Is Gross Domestic Product?

Plus500 | Thursday 26 October 2023

The United States’ Q3 GDP figures are expected to be released on Thursday, October 26th at 8:30 Eastern time. For traders who seek to understand the health of the economy better, knowing the definition of Gross Domestic Product (GDP) is a good step toward achieving that goal. Accordingly, this article explores the meaning of GDP, the different types of GDP, how to calculate GDP, and the effects of the upcoming US GDP releases on the market. 

GDP article

What Is Gross Domestic Product (GDP)?

So what is the simple definition of GDP? GDP or Gross Domestic Product is the total market or monetary value of the produced goods and services within a country’s borders over a specified time period. Since it measures the market value of produced goods and services, this economic index gauges a country’s growth or decline. Moreover, the ideal GDP growth rate is between 2% and 3%, according to economists. (Source:Investopedia)

History of GDP

Historically, the concept of GDP emerged in the aftermath of the Great Depression and World War II eras. While the history of GDP is certainly not devoid of action and monumental milestones, here are three key events behind the emergence of GDP:

1937

In 1937, Simon Kuznets, an economist in the National Bureau of Economic Research generated a report to the US Congress in which he presented the original formation of GDP. He intended to gauge the overall economic production companies, governments, and individuals delivered in order to understand the health of the economy. 

1944

GDP became a standardized measure of a country’s economy following the Bretton Woods Conference. 

1999

The US Commerce Department announced that the GDP was one of the 20th century’s great inventions. 

How Is GDP Measured?

Measuring GDP can be done using the following methods:

  • Income: GDP can be calculated by measuring all of the factors of the economy’s production including labor wages, land rent, interest payments, and profits. Basically, any factor that contributes to national income.

  • Output: GDP can be calculated by adding up the values of all goods and services created by its various sectors - agriculture, manufacturing, energy, construction, and service industries.

  • Spending: GDP can be calculated by measuring all of the money spent by the different groups that participate in the economy like governments, companies, businesses, and consumers. (Source:BBC)

How Does GDP Affect Me?

Broadly speaking, an increase in GDP rates usually generates more work opportunities, this is because it indicates a healthy economy and, consequently,  higher chances of prosperity and wage growth. On the flip side, lower GDP means that an economy is possibly underperforming or struggling, and as such, there would be fewer job opportunities, and perhaps even layoffs like those observed in the tech industry last year partially due to high inflation, the war in Ukraine, and the Coronavirus pandemic. Nonetheless, due to GDP's multifaceted nature and various factors and components, higher GDP does not necessarily mean good news for everyone as it depends on the financial sector and the individual in question. This can be similar to how certain financial sectors and assets, which are often called safe-havens, perform well in recessions or inflationary atmospheres whereas other sectors struggle. 

Types of GDP

GDP comes in different forms and types like Nominal, Real, and Per Capita, among others. Below, we discuss the aforementioned types of GDP:

Nominal GDP

An economy's nominal GDP includes the current prices of all goods and services in a specific year in the calculation of economic production. This includes inflation and rising prices. 

Real GDP

In contrast, to Nominal GDP, Real GDP is adjusted for inflation (does not include inflation in its calculation) and is considered one of the most accurate portrayals of a country’s economic health. It is usually determined by a predetermined base year or by using the previous year's price levels to determine the prices of goods and services.

GDP Per Capita 

Economic output per person is measured by GDP per capita which gauges the amount of money earned per person in a nation. In order to assess a population's standard of living and quality of life, this type of GDP evaluates the average per-person income.

Which Country Has the Highest GDP?

According to a Forbes India report, as of 2023, the United States boasts the highest GDP worldwide at $26,954 billion, trailed by China at $17,786 billion, and Japan at $4,231 billion. (Source:Forbes India)

What to Expect from Thursday’s GDP Release?

Today, Thursday, October 26th, the US Bureau of Economic Analysis (BEU) is expected to release the US Q3 GDP figures. 

Following a challenging year whereby consumers and traders alike had to grapple with rising inflation coupled with recessionary fears and geopolitical tensions from all over the world, keeping track of today’s release may provide helpful and valuable information. 

This data has the potential to furnish valuable insights about the trajectory of the global economy in the coming months and, more specifically, shed light on the future direction of the US economy.

Although the results of today's release remain uncertain, economists at the Wall Street Journal express the view that the US economy likely thrived in the third quarter. They expect an annualized rise of about 4.7%. If this forecast comes to fruition, it would represent a growth rate of more than double that of the second quarter, which was recorded at 2.1%.

It appears that despite the economic challenges of this year, American consumers have not been overly cautious with their spending. Throughout the summer, many Americans directed their funds toward leisure activities like concerts and movies.

This spending trend was further supported by a strong labor market and savings accumulated during the Covid-19 pandemic, due to government relief efforts and lower mortgage rates. As such, many employers added jobs to the market this quarter as “unemployment remains near historic lows.

In addition, inflation, which took a toll on many market sectors this year, seems to have cooled off from its peak in June perhaps driven by the Fed’s higher-for-longer monetary policy

According to some economists like Bill Adams, “the U.S. economy might have already gotten through the stickiest spot of the post-pandemic normalization.”

However, even with these optimistic forecasts, it's crucial to acknowledge that such expectations are set against the backdrop of persisting hawkish Federal Reserve hikes, ongoing conflicts in the Middle East and Ukraine, and various economic challenges and uncertainties. All of these factors have the potential to impact the validity of these projections and influence the trajectory of the US economy in the coming months. Furthermore, the specter of a recession remains a possibility that cannot be entirely ruled out.

More Key Data to Bear in Mind

In addition to today's GDP release, traders, analysts, and consumers should keep an eye on the Personal Consumption Expenditures (PCE) release scheduled for Friday, October 27th. This data can offer a more detailed understanding of US consumer spending.

Furthermore, today will see the release of US Wholesale Inventories and Initial Jobless Claims, providing further perspectives into the growth of the world's largest economy.

Conclusion

In conclusion, the release of Q3 GDP figures on October 26th can reflect the health of the US economy. While the US economy along with other economies in the world has faced numerous challenges this year, it seems that some analysts are optimistic about today’s release as they anticipate a robust performance. 

Still, despite these optimistic forecasts, traders may want to approach the economy with caution and keep in mind the fact that hawkish rates, wars, and the possibility of a recession remain hurdles that may need to be overcome.


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