Gross domestic product (GDP)

Refers to the output produced by the economy of a country or region within a certain period of time (a quarter or a year) The value of all final products and services is often recognized as the best indicator of a country's economic status. It not only reflects a country's economic performance, but also reflects a country's national strength and wealth.

Generally speaking, GDP*** has four different components, including consumption, private investment, government spending and net exports. It is expressed as:

GDP = CA + I + CB + X

In the formula: CA is consumption, I is private investment, CB is government expenditure, and X is net exports .

Whether a country or region's economy is in a growth or recession stage can be observed from the changes in this number. Generally speaking, GDP is announced in two forms: total amount and percentage rate. When the GDP growth number is positive, it means that the region's economy is in the expansion stage; conversely, if it is negative, it means that the region's economy has entered a recession. Gross domestic product refers to the number obtained by multiplying the total amount of goods and services produced within a certain period of time by the "money price" or "market price", that is, nominal GDP, and the nominal GDP growth rate is equal to the real GDP growth rate. The sum of GDP growth rate and inflation rate. Therefore, even if total output does not increase and only the price level rises, nominal GDP will still rise. In the case of rising prices, the increase in GDP is just an illusion. What has a substantial impact is the rate of change of actual GDP. Therefore, when using the GDP indicator, the GDP deflator must also be used to calculate the GDP deflator. Nominal GDP is adjusted to accurately reflect real changes in output. Therefore, an increase in the GDP deflator in a quarter is sufficient to indicate the inflation situation in that quarter. If the GDP deflator increases significantly, it will have a negative impact on the economy. It will also be a harbinger of tightening money supply, rising interest rates, and then rising foreign exchange rates.

Analysis of Gross Domestic Product Indicators

The substantial growth of a country's GDP reflects the country's vigorous economic development, increased national income, and increased consumption capacity. In this case, the country's central bank will likely raise interest rates and tighten the money supply. The country's economic performance is good and the rise in interest rates will increase the attractiveness of the country's currency. On the other hand, if a country's GDP experiences negative growth, it indicates that the country's economy is in recession and its consumption capacity has been reduced. At this time, the country's central bank may cut interest rates to stimulate economic growth again. The decline in interest rates and the sluggish economic performance will reduce the attractiveness of the country's currency. Therefore, generally speaking, high economic growth rates will push up the country's currency exchange rate, while low economic growth rates will cause the country's currency exchange rate to fall. For example, from 1995 to 1999, the average annual GDP growth rate of the United States was 4.1%, while among the 11 countries in the Eurozone, except Ireland (9.0%), which was higher, the GDP growth rate of major countries such as France, Germany, and Italy was only 2.2%. %, 1.5% and 1.2%, which are much lower than the level in the United States. This has prompted the euro's exchange rate against the US dollar to decline since its launch on January 1, 1999, depreciating 30% in less than two years. But in fact, the impact of differences in economic growth rates on exchange rate changes is multifaceted:

First, a country’s high economic growth rate means an increase in income and an increase in domestic demand, which will increase the country’s Imports will lead to a current account deficit, which will cause the domestic currency exchange rate to fall.

Second, if the country's economy is export-oriented and economic growth is to produce more export products, the growth in exports will make up for the increase in imports and slow down the downward pressure on the domestic currency exchange rate.

Third, a country’s high economic growth rate means that labor productivity increases rapidly and costs are reduced, thereby improving the competitive position of domestic products and conducive to increasing exports and curbing imports; and high economic growth rate makes the country The country's currency is favored in the foreign exchange market, so the country's currency exchange rate will tend to rise.

In the United States, the Department of Commerce is responsible for analyzing and statistics of gross domestic product, and the practice is to estimate and compile statistics every quarter. Each time after the preliminary estimates are published, there will be two revisions (the first revision & 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 it increases, it means that the economy is faster, which is conducive to the appreciation of its currency; if it decreases, it means that the economy is slowing down, and its currency will have depreciation pressure. For the United States, a GDP growth rate of 3% is an ideal level, indicating that economic development is healthy. A level higher than this level indicates inflationary pressure; a growth rate lower than 1.5% indicates a slowdown in the economy. Moderation shows signs of recession.