Gross domestic product (GDP) is defined as the total value of goods and services produced within a country’s borders in a specific period. This can be monthly, quarterly, or annually. GDP is one of the most widely used measures of an 澳洲幸运5开奖号码历史查询:economy’s output or production. But, why is it important? It is an accurate indicator of the output of an economy, and the GDP growth rate is probably the single best indicator of 澳洲幸运5开奖号码历史查询:economic growth.

Understanding Why GDP Is Important

澳洲幸运5开奖号码历史查询:Paul A. Samuelson and William Nordhaus neatly sum up the importance o♒f the national accounts and GDP 🍌in their seminal textbook "Economics."

While GDP and the rest of the national income accounts may seem to be arcane concepts, they are truly among the great inventions of the twentieth century.

They liken the ability of GDP to give an overall picture of the economy to that of a satellite in space that can survey the weather across an entire continent.

GDP allows policymakers and 澳洲幸运5开奖号码历史查询:central banks to judge whether the economy is contracting or expanding, whether it needs a boost or needs to be restrained, and if threats like a recession or rampant 澳洲幸运5开奖号码历史查询:inflation loom.

The National Income and Product Accounts form the basis for measuring GDP. Policymakers, economists, and businesses analyze the impact of variables such as 澳洲幸运5开奖号码历史查询:monetary and fiscal policy and 澳洲幸运5开奖号码历史查询:economic shocks. This information helps them create tax and spending plans on specif♉ic subsets of an economy and the overall economy.

Using GDP Data

Most nations release GDP data every month and quarter. In the U.S., the 澳洲幸运5开奖号码历史查询:Bureau of Economic Analysis (BEA) publishes an advance release of quarterly GDP four weeks after the quarter ends, and a final release three months after the quarter ends. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.

The advance GDP data has the most impact on the markets as it is the first snapshot of how well the economy is performing. Subsequent releases 🦄have limited market impact unless there is a significant variance from the advance GDP figure. This is due to the amount of time that elapses between the ꩵquarter-end and these releases.

How to Calculate GDP

GDP can be calculated through the expenditure approach—the sum of everyone's spending in an economy over a particular period. The 澳洲幸运5开奖号码历史查询:income approach—the total of what everyone earned—can also be used. Both should produce the same result. A third method, called the 澳洲幸运5开奖号码历史查询:value-added approach, calculates GDP by industry.

Expenditure-based GDP produces both real (inflation-adjusted) and 澳洲幸运5开奖号码历史查询:nominal values, while the calculation of income-based GDP is only carried out in nominal values. The expenditure approach is the more common one and is obtained by summing up total consumption, government spending, investment, and 澳洲幸运5开奖号码历史查询:net exports. GDP is calculated as follows:

GDP = C + I + G + (X – M)

Where:

• C = Private consumption or 澳洲幸运5开奖号码历史查询:consumer spending
• I = Business spending
• G = Government spending
• X = Value of exports
• M = Value of imports

Factors That Affect GDP

GDP fluctuates because of the 澳洲幸运5开奖号码历史查询:business cycle. When the economy is booming and GDP is rising, there comes a point when inflationary pressures build up rapidly as labor and productive capacity approach full utilization. This leads the central bank to commence a cycle of 澳洲幸运5开奖号码历史查询:tighter monetary policy to cool down the overheating ♊economy and quell inflation.

Interest Rates

As 澳洲幸运5开奖号码历史查询:interest rates rise, companies and consumers cut back spending, and the economy slows down. Slowing demand leads companies to lay off employees, further affecting 澳洲幸运5开奖号码历史查询:consumer confidence and demand.

To break this vicious cycle, the central bank eases monetary policy to stimulate economic growth and employment until the economy is boomin꧃g once again. This cycle repeats over time.

Consumer Spending

澳洲幸运5开奖号码历史查询:Con🀅sumer spending is the biggest component, accounting for over two-thirds of the U.S. economy. 澳洲幸运5开奖号码历史查询:Consumer confidence, therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low level refl👍ects uncertainty about the future and an unwillingness to spend.

Business Investment

Business investment is another critical component of GDP since it increases productive capacity and boosts employment. Government spending also assumes particular importance as a component of GDP when consumer spending and business investment decline sharply, for instance, after a 澳洲幸运5开奖号码历史查询:recession.

Finally, a 澳洲幸运5开奖号码历史查询:current account surplus also boosts a nation’s GDP since (X – M) is positive, while a chronic deficit is a drag on GDP.

Drawbacks of GDP

One of the main drawbacks of GDP is that it does not account for the black market since it rel✨ies on official data that doesn't consider such factors. This can be significant in nations where there are active underground economies.

It is also geographically limited in an open global economy. 澳洲幸运5开奖号码历史查询:Gross national product (GNP), which measures the output from the 🧔citizens and companies of a particular nation regardless of their location, is viewed as a better measure of output than GDP in some cases.

For instance, GDP does not consider profits earned by a country through overseas companies that are remitted back to foreign investors. This can overstate a country's actual economic output. For example, Ireland had a GDP of €509.95 billion and a GNP of €388.01 billion in 2023, the difference of €121.94 billion (or about 24% of GDP) mainly due to profit 澳洲幸运5开奖号码历史查询:repatriation by foreign companies based in Ireland.

GDP emphasizes economic output without considering economic well-being. GDP growth alone cannot measure a nation's development or its citizens' well-being. For example, a country may be experiencing rapid GDP growth, but this may impose a significant cost to society regarding environmental impact and an increase in 澳洲幸运5开奖号码历史查询:income disparity.

GDP Globally

GDP is also important because it allows economists to learn about global trends. For instance, China and India have succeeded despite their massive populations, with China's GDP growing from $149.54 billion in 1978 to $17.79 trillion in 2023. India experienced a slower growth pace over the same period—$137.3 billion to $3.57 trillion.

The following image shows that 澳洲幸运5开奖号码历史查询:emerging markets and developing nations grew faster than the developed world between 1990 and 2019. The divergence in growth rates began to narrow in 2007. The red line represe💧nts the GDP of emerging markets and developing economie🅷s, the blue line is advanced economies, and the brown line represents the world's GDP.

In 2011, developing countries collectively recorded GDP growth of 6.1%, while 澳洲幸运5开奖号码历史查询:developed nations only grew by 1.8%. The gap tightened by 2019, but in 2020, the COVID-19 pandemic interfered with most countries' outputs. By 2024, developing countries' collective GDP increased by 4.2%, while developed nations' GDP increased by only 1.8%.

The divergence in output prevalent in the first part of the century appears to be reoccurring, according to the 澳洲幸运5开奖号码历史查询:International Monetary Fund's (IMF) World Economic Outlook Update for October 2024.

Total Market Cap to GDP

One interesting metric that investors can use to get a sense of the valuation of an equity market is the ratio of 澳洲幸运5开奖号码历史查询:total stock market capitalizaꦿtion to GDP, expressed as a percentage. The closest equivalent to this in stock valuation is the market cap to total sales (or revenues), which, in per-share terms, is the well-known 澳洲幸运5开奖号码历史查询:price-to-sales ratio.

Just as stocks in different sectors trade at widely divergent price-to-sales ratios, other nations trade at stock-market-cap-to-GDP ratios that are all over the map. For example, in 2022, the U.S. had a stock-market-cap-to-GDP ratio of 156.5%, China had a ratio of just over 64.1%, and India had a ratio of 107.5%.

However, the utility of this ratio lies in comparing it to historical norms for a particular nation. For example, the U.S. had a stock-market-cap-to-GDP ratio of 137% at the end of 2015, surging to 195% by the end of 2020. Given the rise in the U.S. stock market by the end of 2020—and with the benefit of hindsight—these readings might be viewed as zones of undervaluation and overvaluation.

The Bottom Line

In terms of its ability to convey information about the economy iꦫn one number, few data points can match the GDP and its growth rate. GDP is used for many purposes, from economic analysis to international investing.