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#Post#: 270--------------------------------------------------
GDP
By: fxvictory Date: December 10, 2014, 9:40 pm
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Definition
GDP represents the total value of the country's production
during the period and consists of the purchases of
domestically-produced goods and services by individuals,
businesses, foreigners and government entities. Data are
available in nominal and real (inflation-adjusted) dollars, as
well as in index form. Economists and market players always
monitor the real growth rates generated by the GDP quantity
index or the real dollar value. The quantity index measures
inflation-adjusted activity, but we are more accustomed to
looking at dollar values.
Individuals purchase personal consumption expenditures --
durable goods (such as furniture and cars), nondurable goods
(such as clothing and food) and services (such as banking,
education and transportation).
Private housing purchases are classified as residential
investment. Businesses invest in nonresidential structures,
durable equipment and computer software. Inventories at all
stages of production are counted as investment. Only inventory
changes, not levels, are added to GDP.
Net exports equal the sum of exports less imports. Exports are
the purchases by foreigners of goods and services produced in
the United States. Imports represent domestic purchases of
foreign-produced goods and services and must be deducted from
the calculation of GDP.
Government purchases of goods and services are the compensation
of government employees and purchases from businesses and
abroad. Data show the portion attributed to consumption and
investment. Government outlays for transfer payments or interest
payments are not included in GDP.
The GDP price index is a comprehensive indicator of inflation.
It is typically lower than the consumer price index because
investment goods (which are in the GDP price index but not the
CPI) tend have lower rates of inflation than consumer goods and
services.
Why Investors Care
GDP is the all-inclusive measure of economic activity. Investors
need to closely track the economy because it usually dictates
how investments will perform. Investors in the stock market like
to see healthy economic growth because robust business activity
translates to higher corporate profits. Bond investors are more
highly sensitive to inflation and robust economic activity could
potentially pave the road to inflation. By tracking economic
data such as GDP, investors will know what the economic backdrop
is for these markets and their portfolios.
The GDP report contains a treasure-trove of information which
not only paints an image of the overall economy, but tells
investors about important trends within the big picture. GDP
components such as consumer spending, business and residential
investment, and price (inflation) indexes illuminate the
economy's undercurrents, which can translate to investment
opportunities and guidance in managing a portfolio.
Importance
Gross domestic product is the country's most comprehensive
economic scorecard.
Interpretation
When gross domestic product expands more (less) rapidly that its
potential, bond prices fall (rise). Healthy GDP growth usually
translates into strong corporate earnings, which bode well for
the stock market.
The four major categories of GDP -- personal consumption
expenditures, investment, net exports and government -- all
reveal important information about the economy and should be
monitored separately. One can thus determine the strengths and
weaknesses of the economy in order to assess alternatives and
make appropriate financial investment decisions.
Economists and financial market participants monitor final sales
-- GDP less the change in business inventories. When final sales
are growing faster than inventories, this points to increases in
production in months ahead. Conversely, when final sales are
growing more slowly than inventories, they signal a slowdown in
production.
It is useful to distinguish between private demand versus growth
in government expenditures. Market players discount growth in
the government sector because it depends on fiscal policy rather
than economic conditions.
Market participants view increased expenditures on investment
favorably because they expand the productive capacity of the
country. This means that we can produce more without inciting
inflationary pressures.
Net exports are a drag on total GDP because the United States
regularly imports more than it exports, that is, net exports are
in deficit. When the net export deficit becomes less negative,
it adds to growth because a smaller amount is subtracted from
GDP. When the deficit widens, it subtracts even more from GDP.
Gross domestic product is subject to some quarterly volatility,
so it is appropriate to follow year-over-year percent changes,
to smooth out this variation.
Frequency
Quarterly
Source
Bureau of Economic Analysis (BEA), U.S. Department of Commerce.
Availability
Usually during the fourth week of the month.
Coverage
Data are for the prior quarter. Data released in April are for
the first quarter. Each quarter's data are revised in each of
the following two months after the initial release.
Revisions
Yes.
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