GDP, which stands for Gross Domestic Product, is a broad measure of production. The GDP calculation in each country reflects the total market value of all the finished goods and services produced in a specific period. Generally, GDP is calculated annually, but it is also calculated quarterly and monthly in some countries. GDP is widely tracked, as traders use it to determine several factors. Traders will analyze whether the reported GDP is stronger or weaker than expected. GDP can have a powerful impact on interest rate levels and play a key role in a currency pair’s direction. Additionally, traders will focus on:
- Growth
- Inflation
- Consumption
How is GDP Reported?
GDP is reported in several ways. For example, in the U.S., the government releases an annualized GDP each calendar year and for every quarter. The quarterly GDP reports reflect quarter over quarter figures as well as year over year figures. The GDP in the U.S. is reported by the Bureau of Economic Analysis (BEA), part of the U.S. Commerce Department. The agencies differ from country to country. The data is a compilation of surveys from builders, retailers, and manufacturers, in addition to other trade information.
How is GDP Calculated?
The GDP calculation in a country incorporates all private and public consumption, investments, and government spending. Additionally, GDP uses private inventories, construction costs, and the foreign balance of trade to generate a final calculation. The foreign trade balance subtracts imports and adds exports when calculating growth.
The largest component is consumption. Personal consumption expenditure in the U.S. GDP makes up 70% of the total GDP calculation. GDP in the U.S. is reported whilst excluding inflation. This figure is called the real-GDP. The GDP measure is somewhat universal, but each country will add nuances to the calculation of GDP. Exports make up the bulk of GDP for many emerging countries.
How Does Trade Impact GDP?
The country’s GDP is consistently affected by the trade balance. GDP increases when the total value of goods and services produced in a country exceeds the full value of foreign goods and services that domestic consumers buy. This situation is called a trade surplus. If consumers spend more on foreign goods and services than they spend on domestic products, this is a trade deficit. When a trade deficit occurs, GDP generally decreases.
How Does Price Impact GDP?
GDP is reported, excluding prices. The impact of inflation is reported separately. This figure is known as the GDP price deflator. This figure reflects how much a change in GDP relies on changes in the price level. It expresses the extent of inflation within the economy by tracking the prices paid by consumers, businesses, and the government.
How Does GDP Impact Forex Trading?
GDP is a component of fundamental analysis. Since it represents a broad outline of growth in a country, it will provide information that will drive interest rates. Forex trading is reliant on the movement of interest rates to guide the direction of an exchange rate. For example, when short-term interest rates move, a currency pair’s forward curves will also change. For example, if you are trading the EUR/USD, and U.S. interest rates rise, but European interest rates remain unchanged, the attractiveness of holding the U.S. dollar will increase. If this occurs, there will be forces that push the value of the EUR/USD down.
The change in short-term interest rates will also the forward curve, which can change the attractiveness of holding one currency over another. Changes to a country’s GDP can alter the forward curve and increase the demand for one currency over another. Additionally, changes to the GDP price deflator can adjust interest rates. If the GDP price deflator is more robust than expected, a trader might begin to price-in higher inflation levels. This rise in inflation expectations would increase interest rates as central banks generally try to deter inflation with higher interest rates. The reverse could be the case if the GDP price deflator falls.
Most traders are looking to see if the released GDP is in line with the analyst’s expectations. If the GDP report is more substantial than expected, that country’s interest rates will likely move higher, making its currency more attractive. Alternatively, if the GDP comes in softer than expected, interest rates in that country will probably fall, making that currency less attractive. You can practice trading using GDP using a forex demo account provided by Rakuten Securities Australia.
How Can You Track Changes to GDP?
Each country releases its GDP regularly. To track the dates and the times, you can use an economic calendar. This type of calendar tells you when a government will release its GDP report. Additionally, it will likely tell you what is expected and the prior quarter’s GDP information. You can also track the release of GDP through a news portal. Traders will often invest just ahead or right after a GDP release if they are betting that it will be different from the expectations.
The Bottom Line
GDP is the total value of goods and services produced within a country. A GDP calculation includes goods and services produced privately as well as publicly by governments. Business investment, as well as trade, play essential roles in calculating GDP. A GDP report not only helps determine domestic growth but also reflects inflation expectations.
The GDP report is a vital report for Forex traders. Growth and inflation are critical drivers of interest rate levels. Since interest rates make up the forward curve used in forex trading, changes to these levels can drive an exchange rate’s future direction. Many traders track whether GDP is stronger or weaker than expected. Healthier domestic growth levels and higher inflation levels tend to increase interest rates and make a currency more attractive. Lower levels of growth and inflation tend to weaken interest rates and make a currency less attractive. You can track any changes to a countries GDP through an economic calendar or a reputable news source.