What is the GDP?

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Market importance: High importance.

Meaning: A total measure of economic conditions, mainly measuring the output capacity of the economy.

Release time: The last of January, April, July, and October, 8:30 a.m. Eastern Time.

Frequency: Once a quarter.

Coverage period: The quarter just ended.

Revision situation: Monthly revisions are minor, and annual revisions are made in July.
GDP (Gross Domestic Product) is the value of all final products and services produced in the economy of a country or region in a certain period (a quarter or a year). This indicator is now widely criticized in the world because it has caused a series of negative impacts.

But this indicator is still the best existing measure of welfare level because it can not only reflect the economic performance of a country but also reflect the national strength and wealth of a country.

Generally speaking, gross domestic product has four different components, including consumption, private investment, government spending, and net exports. It is expressed by the formula: GDP = C + I + G + X.

In the formula: C is consumption, I is private investment, G is government spending, and X is net exports.

If we want to judge whether the economy of a country or region is in a growth stage or a recession stage, we can observe it from the change in this number. Generally speaking, GDP is published in two forms, with total amount and percentage rate as calculation units.

When GDP grows positively, it shows that the economy of the region is in an expansion stage; on the contrary, if it is negative, it means that the economy of the region has entered a recession period.

Since the gross domestic product is the number obtained by multiplying the total amount of goods and services produced in a certain period by the "money price" or "market price", that is, the nominal gross domestic product. The nominal gross domestic product growth rate is equal to the sum of the real gross domestic product growth rate and the inflation rate.

Therefore, even if the total output does not increase, only the price level rises, the nominal gross domestic product will still rise, and in the case of a price rise, the rise of gross domestic product is just an illusion.

However, what has a substantial impact is the real gross domestic product growth rate, so when using the gross domestic product indicator, it is also necessary to adjust the nominal gross domestic product through the GDP deflator, to accurately reflect the actual changes in output.

Therefore, the increase in GDP deflator in a quarter is enough to indicate the inflation situation of the quarter. If the GDP deflator increases significantly, it will hurt the economy, and it is also a sign of the tightening of the money supply, the rise of interest rates, and the rise of foreign exchange rates.

If a country’s GDP grows significantly, it means that the country’s economy is booming, national income increases, and consumption capacity also increases. In this case, the central bank of the country may raise interest rates, and tighten the money supply, and the good performance of the national economy and the rise of interest rates will increase the attractiveness of the country’s currency.

On the contrary, if a country’s GDP shows negative growth, it shows that the country’s economy is in a recession, and consumption capacity decreases. At this time, the central bank of the country may lower interest rates to stimulate economic growth again, and the decline of interest rates coupled with poor economic performance will reduce the attractiveness of the country’s currency.

Therefore, generally speaking, a high economic growth rate will promote the rise of the exchange rate of the domestic currency, while a low economic growth rate will cause the decline of the exchange rate of the domestic currency.

For example, from 1995 to 1999, the average annual growth rate of the US GDP was 4.1%, while in the 11 eurozone countries, except for Ireland (9.0%), the GDP growth rates of major countries such as France, Germany, and Italy were only 2.2%, 1.5%, and 1.2%, respectively, much lower than the US level. This prompted the euro to slide against the dollar since its launch on January 1, 1999, depreciating by 30% in less than two years.

But in fact, the impact of economic growth rate differences on exchange rate changes is multifaceted.

(1) A high economic growth rate of a country means that income increases, the domestic demand level increases, and the country’s imports will increase, resulting in a current account deficit, which will cause the exchange rate of the domestic currency to fall.

(2) If the country’s economy is export-oriented, economic growth is to produce more export products, then the growth of exports will offset the increase of imports, and ease the pressure of the decline of the exchange rate of the domestic currency.

(3) A high economic growth rate of a country means that labor productivity increases rapidly, costs decrease, and improve the competitiveness of domestic products, which is conducive to increasing exports and restraining imports, and the high economic growth rate makes the country’s currency look good in the foreign exchange market, thus the exchange rate of the country’s currency will have an upward trend.

The gross domestic product indicator in the United States is analyzed and statistically analyzed by the Department of Commerce. The convention is to estimate and count once a quarter. After publishing the preliminary estimate data (The Preliminary Estimates), there will be two revisions (The First Revision and the Final Revision), mainly published in the third week of each month.

Gross domestic product is usually used to compare with the same period last year. If there is an increase, it means that the economy is faster and the currency is appreciated; if there is a decrease, it means that the economy is slowing down and the currency is under pressure to depreciate.

In the United States, a 3% growth in gross domestic product is an ideal level, indicating that the economy is healthy, higher than this level indicates inflationary pressure; lower than 1.5% growth, it shows that the economy is slowing down and has signs of entering recession.

A better time to trade is when the GDP news data is released. You can trade with the trend. Do not range trade. This data will not be good or bad. Because it only releases one piece of data. Some news data releases more than one data at the same time. Some data is good and some data is bad, so market fluctuations will not be trending.

Market fluctuations caused by GDP data are mainly trending. However, in rare cases, GDP data is significantly better, but the currency only strengthens briefly and then starts to weaken. This is when we need to process trade orders in a timely manner. This is because such currencies are highly influenced by market sentiment. For example, during the European debt crisis, the GBPUSD pair rose briefly after the release of relatively good GDP data and then weakened sharply, eventually accumulating a loss of more than 200 pips against the USD.

For automated trading systems, we still do not recommend running an automated trading system on the day of the GDP announcement. However, if your trading system focuses on trend rather than range trading, then you can run a trading system. Therefore, it is important to understand the logic of the trading system. No trading system can accommodate all market conditions.

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