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What is GDP and what does it mean for a trader?

The Gross Domestic Product or GDP indicator reflects the market value of all products and services produced by all manufacturers in all sectors of the economy in a particular state for consumption, export and accumulation over a certain period of time.

The country’s GDP is measured in national currency, and, if necessary, can be converted at the average rate of the national currency in US dollars for comparison with other countries. This indicator can be measured for a year, quarter or month in comparison with the previous period or the same period. For example, US GDP can be measured year to year (2017 to 2016), or quarter to quarter (IV quarter of 2017 to IV quarter of 2016), or month to month (March 2018 to March 2016).

What does GDP per capita and purchasing power parity mean?

GDP can be measured in relation to the number of citizens living in the country – GDP per capita. This indicator allows you to understand how many goods and services are produced per person.

GDP can be measured at purchasing power parity, that is, the value of a certain set of goods in national currency, excluding transportation of these goods. A comparison of the cost of similar sets of goods in different countries allows you to determine how much the ratio of the national currency corresponds to parity with another currency. In theory of purchasing power parity, if a particular product, taking into account the exchange rate, is cheaper than the same product in another country, then it is beneficial to export to that country. In practice, there can be a lot of restrictions for such an overflow of goods, starting from high transport costs, ending with state regulation of foreign trade operations with the help of duties and other restrictions.

GDP per capita and purchasing power parity indicators more accurately reflect the effectiveness of creating a gross domestic product of a particular state in relation to others. These indicators are most often compared in US dollars.

What is the country’s GDP for the “same period”?

For comparison, the concept of “comparative period” or “similar period” is used. This is done in order to take into account the “seasonality factor” in assessing production volumes. Obviously, a large number of weekends at the beginning of the year in Russia means the production of fewer goods in January. Christmas holidays in Europe and the USA have a similar effect. Agricultural production has a pronounced seasonality of preparatory work, harvesting. A serious factor for agricultural production is weather conditions and the geographic location of the state.

Countries and GDP in comparison

The volume of GDP is the most important indicator of the size of the economy of a state. The larger the size of GDP, the more powerful the economy of this country. Each country calculates the size of GDP. Moreover, there are international methods for calculating it, which allows you to determine the place of the state in the international economic hierarchy.

A comparison of GDP is made internationally by various institutions. The most respected are the International Monetary Fund, the World Bank and the United Nations.

TOP-20 countries in terms of GDP for 2016

Title GDP billion US dollars
USA 18569
China 11218
Japan 4939
Germany 3467
Great Britain 2629
France 2463
India 2256
Italy 1851
Brazil 1799
Canada 1529
The Republic of Korea 1411
Russia 1281
Australia 1259
Spain 1233
Mexico 1046
Indonesia 932
Turkey 857
Netherlands 771
Switzerland 660
Saudi Arabia 640

Even by the nominal size of GDP, it can be understood that the United States and China occupy a dominant position in the world in terms of the size of their economy. However, if we measure the production of GDP by country per capita or by purchasing power parity, the picture will be somewhat different. So, in terms of GDP per capita in 2016, Luxembourg will take the first place, followed by Switzerland, Norway and Macau. According to this indicator, the United States is only in 8th place, while China is still in 70th place. If you look at the PPP GDP indicator, then China will be in first place, the United States in second and Russia immediately in sixth place.

Why do ordinary traders need GDP indicators?

The size of the economy as a whole is important in terms of both production and consumption of goods, including imports. Therefore, you just need to understand which countries are leading in terms of size of economy. What will happen to the economy of the top ten countries in terms of GDP will certainly affect the global scale.

Of course, the currencies of not all countries from this list are funding currencies and are used for international payments. Say, China’s GDP growth does not directly affect the value of the renminbi, since the currency of this country does not have a wide turnover in international financial markets. But a significant reduction in China’s GDP can affect many currencies that are actively traded, for example, Australian and New Zealand dollars, and even the US dollar and the euro.

The most important indicator for a trader is not even the size of GDP, but its dynamics: the more actively the economy of a country develops, the stronger its currency. It is also important how actual growth rates are in line with expectations. Unexpected GDP growth or its decline may form significant rate movements. In this regard, the larger the size of the economy, the greater the movement of the exchange rate even with a slight excess of expectations. For example, an excess of the actual growth of US GDP by 0.1 percentage points to the expected value, is quite capable of causing a strengthening of the US currency. In the case of the Russian economy, such excess will not be enough; more serious actual growth will be required to form the movement.

The GDP indicator, along with the rate, inflation and unemployment, is the most important macroeconomic indicator that can affect the movement of the national currency at the moment.

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