How GDP Could Make or Break Your Investment

The gross domestic product or GDP is an economy’s health indicator. It gauges the performance of a country by calculating the total value in dollars of the entire production of goods and services over a specified period of time. The GDP can be seen as the size of the country’s economy. It is expressed in percentage of the country’s growth.

Now, you might think that GDP is just another number to boast about. It is not. For investors, it is one of the most crucial data that they need to accurately predict future market movement. This is because the GDP is the most broad indicator that properly gauges a country’s well-being.

Calculating the GDP is a bit complicated. The official GDP calculation is done by economists while other people like us use a much simpler method that will estimate the number. What most investors do is use two main approaches. The income approach and the expenditure method. By doing the income approach, you add the income of the businesses and the public, namely the compensation of employees, gross profits for incorporated and unincorporated firms, and taxes without the subsidies. The other measuring technique is the expenditure method where you compute all of the amount of the money spent namely the investments, government spending, consumption, and net exports. Both methods should yield roughly similar results.

The GDP actually affects everyone in a country. Because it is an indicator, you’ll notice the different manifestations of this important percentage. In an economy with good GDP people will experience low unemployment and high wages. This is because businesses demand for more labor in a growing economy. The opposite is true for a country with low GDP.  As an investor the GDP can affect you in many ways. The direct effect is the swings it immediately causes in the stock market. If the GDP is high, it means that companies have had a good profit and thus better stock performance. On the other hand, low GDP means low performance for the companies and it might drag down market sentiment.

Good investors keep an eye on GDP. They keep it in check to make sure their investments are safe.