Gross Domestic Product (GDP) is the total value of all goods and services produced for a certain period (quarter, year) in the territory of a particular country and intended for final consumers.
The importance of the concept of GDP is emphasized by the fact that it is often used as a synonym for the concept of “economy”. For example, when they say about a certain country that it is the tenth economy of the planet, they mean that in terms of GDP, this country is in tenth place in the world.
Or when they say that the economy of one country is three times larger than the economy of another country, this means that in the first country, goods and services are produced in a year for an amount three times greater than in the second country. And who hasn’t heard such a phrase: “The economic growth rate this year amounted to …”? Yes, yes, in fact, in this phrase we are talking about the rate of GDP growth!
There are several special formulas for calculating GDP, but we will not give them (if you wish, you can always find them using the Internet or a university textbook on macroeconomics). In practice, it is enough to understand that GDP is the total value of all goods and services produced in the country, for example, in a year.
Real and nominal GDP – What’s the difference?
Let’s take a primitive example. There is a certain tiny state of one square kilometer in which only one enterprise operates – a bakery. Last year, the bakery produced a hundred thousand loaves of bread that cost one dollar each.
Thus, the GDP of this country was one hundred thousand dollars (100,000 x $1 = $100,000). The bakery also plans to produce 100,000 loaves this year, but has doubled the price of its products. The question is: will the country’s GDP increase in this case?
Let’s count. Now we will multiply one hundred thousand loaves not by one dollar, but by two: 100,000 x $2 = $200,000. It turns out that this year the GDP of our fictional country will double? Yes and no. nominal GDP will double – it is calculated in current prices, and it may well grow when production volumes do not actually increase or even decrease, due to price increases alone – inflation.
But real GDP will remain unchanged: for its calculation, prices are taken that took place in the year taken as the base one. Let’s say that in the base year the price of a loaf of bread was $0.5 – it is by this price that the number of loaves produced both in the past and in the current year will be multiplied.
And since this number remained unchanged, equal to one hundred thousand, then real GDP in both years will be the same: 100,000 x $0.5 = $50,000. If nominal GDP is divided by real GDP, we get the GDP deflator – the inflation indicator that we talked about in the last lesson .
How can a trader monitor the GDP growth of the countries he is interested in?
GDP reports are published quarterly. However, this does not mean that only four reports are published in each country per year. Let’s look at how this happens using the example of the United States. In the last days of the first month of each quarter, a preliminary report on GDP for the previous quarter is published. Then, about a month later, a revised report comes out, and about a month later, the final version is released.
Thus, the final data on GDP for the past quarter become available to the public literally in the last days of the quarter following it. Moreover, in practice, even this “final report” may not be final: sometimes it, too, changes and clarifies over time.
You can find out the dates of publication of reports on the GDP of the countries you are interested in, as well as the main figures of these reports from the economic calendar. Also, the main points of such reports and analysts’ comments on their content are published in the Dow Jones news feed in Russian. If you speak foreign languages and want to study this or that report in detail, look for it on the website of the statistical office of the corresponding country.
We add that the most important data in the reports on GDP are not absolute figures (how many billions of dollars was GDP in a particular quarter), but relative ones. Traders and investors are primarily interested in quarterly (denoted q/q) and annual (denoted y/y) GDP growth rates, that is, how much it increased or decreased compared to the previous quarter and compared to the same quarter last year.
What is the impact of GDP reports on the dynamics of currency pairs?
The impact of GDP reports on the quotes of currency pairs is difficult to describe unambiguously. It is worth bearing in mind the following points.
The revised GDP report may be fundamentally different from the preliminary one, and the final one from the revised one. It happens that the preliminary report shows very low GDP growth, but in the end the final report says that in fact the economy grew quite well in the reporting quarter. Understanding this, it would probably be wise not to react to the GDP data until the final figures come out.
However, these final figures become known only three months after the end of the reporting quarter, when the next quarter is already coming to an end, and by this moment they are of little interest to the market. Therefore, no matter how silly it may seem, the FOREX market is more responsive to preliminary and revised GDP reports than to the final ones.
The reaction to the GDP report depends on expectations and sentiment. It would seem that if the report on GDP turned out to be strong, the exchange rate of this country should rise, because the good state of the economy speaks in favor of higher interest rates. In principle, it is, but a lot depends on expectations.
If the release of a strong report was predictable and expected, the reaction to it may be neutral or even negative (for example, if the report turned out to be good, but still not as impressive as expected). In addition, traders often act on the principle of “buy on expectations – sell on facts”, that is, they buy a currency for which positive news is expected, and when this news does come, they sell it, fixing profits. Similarly, with weak reports on GDP.
Really strong movements in the market reports on GDP cause in cases where they sharply diverge from expectations. For example, they expected a weak report, but a strong one came out: most likely, the exchange rate of this country will jump up sharply. Therefore, for a trader relying on fundamental analysis, on the eve of the release of GDP reports, it is important to understand what the market expects regarding the upcoming reports. And since the market is guided by analysts’ forecasts in its expectations, it is worth asking what consensus forecasts are given by Bloomberg analysts (their forecasts are usually published in economic calendars) and Wall Street Journal analysts (their forecasts are given in the Dow Jones news feed).
The market reaction is also influenced by the emotional context and the news background around the publication of the report. For example, if the market is under the impression of some strong data that has just been released (on employment, industrial production, etc.), a weak report on GDP will not spoil its mood – after all, it is about the last quarter, and more the latest data suggests that the situation has improved much since then.
Thus, the Australian and New Zealand dollars will most likely react positively to a strong report on China’s GDP, since China is an important export market for Australia and New Zealand. In addition, confidence in the strength of one of the largest economies on the planet will allow us to be more optimistic about the prospects for the entire global economy, and this will cause greater interest in risky currencies and reduce interest in safe-haven currencies (primarily the Japanese yen).
