Gross Domestic Product (GDP) is one of the most important numbers to understand when evaluating how productive a country is. GDP represents the total market value of finished goods or services produced in a country within a period, usually one year or a quarter. Everyone — from politicians, investors, businesses, and citizens — is impacted by the integrity of the global and local economies. GDP will give someone a glance of a nation’s economic size and whether it is growing or shrinking compared to past data.
Nominal GDP vs. Real GDP
GDP has two main forms in which it is spoken: nominal GDP and real GDP.
Nominal GDP considers current market prices without factoring for deflation or inflation, which is tracking general changes in an economy’s value over time. Real GDP, however, factors in deflation and inflation, meaning it is more accurate when calculating a country’s economic health.
What Makes Up GDP?
The equation for GDP equals consumer spending + business spending + government spending on goods and services + (exports – imports). In 2022, the United States’ total GDP was $25.46 trillion. Of that figure, 68% was from consumer spending. Consumer spending is the most crucial component of GDP, driving the entire United States economy.
Effects of GDP
GDP can have major impacts on the economy, both positive and negative. If GDP sees continual growth, that means the economy is expanding with low unemployment and wage increases. However, if the GDP growth is speeding up too fast, the Federal Reserve may raise interest rates to curb inflation (the rise of price in goods or services). This would mean loans for homes and automobiles could be more expensive. If GDP growth is negative, it could lead to fears of a recession which means potential layoffs and unemployment, a decrease in consumer spending and business revenues. The common rule of thumb is when there are two consecutive quarters of negative GDP growth, that means recession.
GDP and Stock Market
GDP and the stock market usually move in tandem. When you see GDP fall, you will likely see stock prices fall as well due to negative earnings through less consumer spending. When GDP grows, that correlates with higher stock prices due to positive earnings from more consumer spending. In a bull market, investors are optimistic, which would lead to an increase in consumer spending. In a bear market, however, investors are pessimistic which would lead to a decrease in consumer spending.
GDP and the stock market usually move in tandem. When you see GDP fall, you will likely see stock prices fall as well due to negative earnings through less consumer spending. When GDP grows, that correlates with higher stock prices due to positive earnings from more consumer spending. In a bull market, investors are optimistic, which would lead to an increase in consumer spending. In a bear market, however, investors are pessimistic which would lead to a decrease in consumer spending.
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This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.