Econ Grapher

GDP - Gross Domestic Product

What is GDP?
A country's GDP (Gross Domestic Product) is the total market value of all final goods and services produced in a country. It is one of the most widely used metrics for gauging the health of an economy. It is also used as a proxy for standard of living because the two are correlated (i.e. higher wealth will lead to higher levels of living standards - certainly at least to the extent that the average wealth level makes it possible to enjoy the basics of life such as food, shelter, education and healthcare etc). 

How does it relate to Markets?
GDP is also a key indicator used in reference to investing and markets as the growth or percentage change in GDP i.e. (GDP1/GDPt-1)-1 serves as a useful indicator of economic activity and thus will flow through into company earnings. For example in a recession i.e. a period of negative GDP growth (a positive percent change in GDP is usually referred to as economic growth), companies will come under pressure and earnings will usually fall. This is because GDP is a summary of output and spending.

Components: GDP = C + I + G + (X – M)
The next thing to look at is the components. This is critical for drilling into what exactly is driving economic growth and assessing the make up of an economy. Quickly, the components are basically: C=Consumption, I=Investment, G=Government, X=Exports, M=Imports (sometimes the trade balance is simply referred to as “net exports”).

Calculation methods
GDP is calculated in three ways: the product (output) approach, income approach, and expenditure approach. The expenditure approach is the most commonly used approach in compiling national accounts. The equation above is from the expenditure approach.

Impact on markets
GDP growth is generally good for markets, and GDP growth that is higher than expected is usually a positive for market (however it may also indicate overheating of an economy, which may result in tightening of monetary policy). Negative GDP growth is bad for the stock market, as are GDP growth results that are lower than expected.

Sources and further reading:
Australian National Accounts: Concepts, Sources and Methods
Concepts and Methods of the United States National Income and Product Accounts
 European Parliament, Policy Department Economic and Scientific Policy: Beyond GDP Study
 Is Life Getting Better : What is GDP?
Investor Words - GDP definition
How to Read GDP Reports

Graph Library:
Metric - GDP

Original Source: http://www.econgrapher.com/encyclopedia-gdp.html

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