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Forex market traders use macroeconomic indicators in their work, that is, indicators of the state of the economy displayed in the economic calendar. And the state of the economy of any country directly affects the exchange rate of the national currency. The most important macroeconomic indicator is gross domestic product (GDP) or GDP. Why is GDP indicator important to a trader? The size of the economy has an impact on the production, consumption and import of goods. Understanding which countries lead in terms of GDP plays a key role in fundamental analysis. The fate of the economies of the top 10 countries will certainly be reflected at the global level.
Not all currencies on this list are used for international payments. For example, China’s GDP growth does not always impact the RMB due to low international circulation. However, China’s GDP decline could impact other currencies including the Australian dollar, New Zealand dollar, US dollar and euro. For a trader, the dynamics of GDP is more important than its size. The active development of the economy strengthens its currency. It is also important that actual growth matches expectations.
An unexpected change in GDP can cause significant movements in the exchange rate. The larger the economy, the more the market reacts to the slightest deviations. For example, a slight overshoot in US GDP growth could strengthen the dollar.
With the Russian economy, it would take a significant beating of expectations to influence the exchange rate. GDP, as well as rates, inflation and unemployment, affect the exchange rate of the national currency.
What is GDP?
GDP measures the health of a national and global economy, explains the International Monetary Fund (IMF). GDP data is based on the total final value of all goods and services produced in a country during a given period. The GDP measurement shows the size and growth rate of an economy.
There are three ways to calculate GDP, explains the Bank of England, the central bank of the United Kingdom. You can add up the total value of goods and services produced in a country, or you can add up everyone’s income. The third way to calculate GDP is to measure how much everyone in a country spent. This includes household spending, investment, government spending, and net exports—the value of your country’s exports to other countries minus the value of your country’s imports.
GDP was first proposed as a concept during America’s Great Depression in 1937, according to financial information site Investopedia. Economist Simon Smith suggested this in a report to the US Congress. It later became widely accepted as a standard way of measuring national economies.
Why does GDP matter?
GDP helps policymakers, investors and businesses make decisions by understanding the state of the economy. It can be used to compare different countries and regions. According to the IMF, when GDP is rising, workers and businesses tend to be better off than when it is not. When GDP declines, employment often declines.
GDP helps governments decide “how much they can spend on public services and how much tax they need to collect”, explains the BBC. If GDP declines for two consecutive quarters, it means the economy is in recession. This could mean “wage freezes and job losses”, the BBC adds.
Globally, the war in Ukraine is expected to contribute to a “significant slowdown” in economic growth this year, the IMF warns. Using real GDP data that does not take into account the impact of inflation on goods and services, the IMF forecasts global growth will slow from about 6.1% in 2021 to 3.6% in 2022 and 2023.
What do experts say about GDP?
Experts say GDP is an imperfect measure of the health of an economy for a variety of reasons. For example, GDP does not measure population growth. If UK GDP grew by 2% and the population grew by 4%, average income per person would actually fall, explains the Bank of England.
There are also things that inflate GDP, but do not make the country more prosperous. For example, government spending on war can increase GDP. Clearing parts of the Amazon rainforest and selling the wood could also lead to a surge in GDP, but at a huge environmental cost.
A growing argument against GDP is that it does not measure the well-being of a country and its people. Well-being, equality and inclusion are key measures of sustainable development around the world – and against this backdrop, the World Economic Forum in 2016 suggested that GDP was “struggling to remain relevant” on its Beyond GDP platform.
One of the solutions proposed by the Forum is to establish a common core set of indicators and recommended disclosures that corporations could use to harmonize their core reporting and thus work towards achieving sustainable and inclusive growth. The result of this work is a coalition of leaders who support progress in developing convergent sustainability reporting standards, and the International Sustainability Standards Board (ISSB) is currently working to create a globally accepted standard for sustainability reporting.
Using GDP Indicators
Nominal and real GDP are two key indicators that are used to evaluate the performance of an economic system. Understanding the differences between them is critical to analyzing the state of the economy. By comparing data on nominal and real GDP, experts can reveal how inflation affects economic development or decline. This comparison helps managers develop rational monetary and fiscal strategies aimed at maintaining stability in the economy. Also, GDP is one of the main indicators for a trader in fundamental analysis and choosing a trading strategy.
Nominal GDP
Total Domestic Product (Gross) is the absolute sum of economic activity. This indicator provides summary data on the general situation and development of the economic situation in the country. Simply put, nominal GDP is the total breakdown of all goods and services produced in a country over a given period of time, most often expressed in modern dollars. It doesn’t even take into account price movements and inflation over time. Look at it as a chaotic index of economic activity without external influences.
Although nominal Gross Product provides a general idea of the monetary value of economic activity, it may not fully reflect actual economic development. This occurs because changes in nominal GDP may be distorted by inflation and population growth rather than reflecting real changes in output or income.
Real GDP
To overcome the limitations of nominal GDP, economic experts use another indicator known as real GDP. Real GDP is adjusted based on changes in prices using constant monetary values, allowing for more accurate comparisons across time periods. This indicator reflects the real rate of economic growth, taking into account the impact of inflation.
By removing the influence of purchasing power from the analysis, real output provides a clearer understanding of how much the economy has grown or fallen over time. This makes it easier for economists to more accurately study trends and patterns of economic activity.
Main differences between nominal and real GDP
Government statistical agencies regularly publish GDP volumes. This is nominal GDP, which may be fictitious for the sake of government policy and propaganda. There are certain fundamental differences between fictitious and real output.
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Fictitious output ignores changes in price levels, does not accurately represent economic prosperity, and can be misleading during periods of inflation or deflation.
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Real production volume takes into account changes in the price level, reflects real costs taking into account the impact of rising prices. May change depending on price dynamics and reflects the real economic development of the country
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Provides a more accurate estimate of economic growth. Provides a more reliable measure of economic success. Used to compare GDP over different periods of time. Used to compare GDP over time while accounting for inflation.
Reasons for GDP Analysis
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Economic Strength: GDP functions as an indicator of the overall health of the economy. An increase in GDP usually indicates stronger economic development, while a low GDP signals economic contraction.
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Political Environment: Governments and politicians rely on GDP data to make informed decisions regarding fiscal policy, monetary policy, and resource allocation. This helps them identify areas that need special attention or intervention.
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Comparing the economic power of different countries: GDP analysis allows you to identify strengths and weaknesses on the world stage. It is a key element in international negotiations and strategic planning, providing insight into the economic situation of various countries. In addition, when calculating real and nominal GDP, different methods are used that take into account inflation or deflation, which contributes to a more accurate analysis of economic growth. Real GDP plays an important role in explaining price changes by taking into account price movements over time and adjusting for inflation or deflation.
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Real Output: By using a special index called a deflator, economics experts can more accurately calculate total output without the impact of price fluctuations. This adjustment allows comparisons of economic performance between different years without taking into account factors associated with price changes. By dividing nominal output (expressed in current market prices) by a deflator, experts can eliminate the effects of inflation or deflation and get a more accurate picture of real output.
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Updating prices on the market: prices are reflected in nominal GDP, which is the cost of goods and services without taking into account inflation. It helps you quickly analyze and monitor changes in consumer spending patterns. By multiplying the volume of each good or service by its current price, nominal GDP is obtained. It provides a snapshot of economic output without taking into account changes in prices over time. Nominal GDP is useful for measuring the short-term performance of an economy.
Using GDP in trading
GDP is one of the indicators of the market calendar.
Market calendar is a tool that allows traders to track the schedule of important events in the financial markets, such as the release of economic data, company reports, central bank meetings, etc. It helps traders plan their trading operations and make informed decisions.
For example, when trading bonds, it is important to use macroeconomic data. Although the primary macro indicators will be the inflation rate and the Central Bank rate, GDP can serve as an indirect sign of the health of the economy.
Unlike geopolitical events such as G7 or OPEC meetings, economic calendars are predominantly focused on pre-scheduled meetings and financial indicators. Careful analysis of these indicators allows traders to gain insight into the state of the global economy. The economic calendar is a chronological compilation of upcoming events, announcements, and data publications. These calendars contain a wide range of information, including but not limited to economic indicators, central bank meetings, government reports, and corporate earnings reports.
For Russian traders trading on ruble accounts, it is very important to know what the GDP of the Russian Federation is, its overall size and per capita values. GDP per capita more accurately reflects the state of the economy and has a stronger impact on the ruble exchange rate to foreign currencies. You can trade the ruble with the broker NeoMarkets, which provides leverage of 1:1000.
