A (credit rating)

An A credit rating is given to borrowers that are considered to have a strong ability to meet their financial commitments. However, they might be more affected by changes in circumstances or economic conditions than borrowers with higher ratings.

AA (credit rating)

An AA credit rating signals a very strong capacity to meet financial commitments. It's one notch below the highest AAA rating, showing high creditworthiness. While highly reliable, borrowers with an AA rating face slightly more risk than those rated AAA, especially in challenging economic conditions.Learn more

AAA (credit rating)

An AAA credit rating represents the highest level of creditworthiness. It indicates an exceptional ability to meet financial commitments, making it the safest investment grade. Borrowers with AAA ratings are considered to have the strongest capacity to withstand economic challenges and maintain their obligations.

Abnormal return

An abnormal return is the difference between an investment's expected return and the actual return. It indicates how much better or worse the investment did compared to what was anticipated, revealing its performance relative to market expectations.

Absolute return funds

Absolute return funds are investment funds designed to make money in all market conditions. They focus on returns rather than trying to outperform the market, and employ a range of strategies - like short selling - in an aim to profit regardless of market direction.

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Accelerated monitoring fees

Accelerated monitoring fees are charges a company pays in advance to private equity advisors for ongoing services, typically triggered when the company is sold or goes public. This upfront payment covers future services that were supposed to be provided over several years.

Accelerated Return Note

An accelerated return note is a financial product that offers potentially higher returns than a specific asset's performance. If the asset does well, investors get increased gains quickly. However, there's a risk of losing money if the asset performs poorly, making it a high-reward but risky investment.

Accounting Currency

Accounting currency is the currency that a company uses in its bookkeeping. While accounting currency may differ from operational currency - i.e. the currency in which a company transacts day-to-day business - it is the main currency for recording transactions and reporting results.

Accounting Insolvency

Accounting insolvency occurs when a company's liabilities exceed its assets on the balance sheet, indicating it owes more than it owns. It's a financial condition in which the company can't cover its debts with its current assets, suggesting potential financial trouble.

Accounting liquidity

Accounting liquidity measures how quickly a company can pay off its short-term debts using available assets. High liquidity means that a company can easily meet its financial obligations, indicating good financial health. Accounting liquidity is crucial for managing cash flow and ensuring operational stability.

Accounting Rate of Return

The accounting rate of return calculates the potential profitability of investments based on their expected net income relative to the initial investment cost and serves to evaluate the financial viability of new projects.

Accounting Ratio

An accounting ratio is a financial metric derived from two or more numerical values found in a company's financial statements. It's used to assess a firm's financial health, operational efficiency, and profitability.

Accretive

Accretive refers to any process or transaction, such as a merger or acquisition, that positively influences the value or earnings of a company or financial asset.

Accretive acquisition

An accretive acquisition is when a company purchases another company, and the resulting merger increases the acquiring company's earnings per share, enhancing shareholder value.

Accrual accounting

Accrual accounting is an accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur. This approach can help provide a more accurate picture of a company’s financial position.

Accrue

In finance, to accrue means to accumulate or receive payments or benefits over time, especially with reference to accruing interest or expenses that are recognised in the accounts before being paid.

Acid-test ratio

The acid test ratio, also known as the quick ratio, measures a company's ability to cover its short-term liabilities with its most liquid assets, excluding inventory, and is recognised as a stringent indicator of financial stability.

Acquisition structure

Acquisition structure refers to the financial and legal framework of a deal when a company acquisition happens. This includes the arrangement of payments, asset transfers, and integration strategies.

Active Investing

Active investing involves the frequent buying and selling of assets to exploit short-term market movements in an attempt to profit.

Active Order

An active order is a trading order that has been placed but not yet been executed, and remains active until either being filled or cancelled. An active order could be a limit order, stop order or conditional order, and can help traders manage positions by specifying the price they are willing to pay or accept for an asset.Learn more

Active trading

Active trading refers to frequent buying and selling of assets in an attempt to profit from short-term market movements, rather than long-term 'buy and hold' type investments.

Activist shareholder

An activist shareholder is someone who purchases a large quantity of a company's shares in an attempt to effect significant change within the company, often seeking to improve financial returns and shareholder value.

Adams Express Company

The Adams Express Company definition is of a diversified equity fund that operates as a closed-end fund, investing primarily in US shares. The company was originally established as a freight and cargo business.

Adjusted Present Value (APV)

Adjusted present value (APV) is a valuation method that separates the value of an investment project from the value of its financing side effects, like tax shields, calculating net present value using the unlevered cost of capital.

Advanced Computerized Execution System

The Advanced Computerised Execution System refers to an electronic platform used in trading that uses advanced algorithms and automation to execute large volumes of securities transactions.

AEX index

The AEX Index is a major stock market index tracking the performance of the top stocks traded on the Amsterdam Exchange. It is often seen as a proxy for the general health of the Dutch stock market and overall economy.

After-Hours Trading (AHT)

After hours trading refers to the buying and selling of assets outside the standard trading hours of major exchanges such as the New York Stock Exchange. It might be used in an attempt to capitalise on price movements following key news events, to hedge, or to avoid price gapping. After hours trading can potentially be more volatile, and therefore risky.

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Agency security

An agency security is a form of debt security issued or guaranteed by US government-sponsored enterprises or federal agencies, excluding US Treasury securities, often used for funding specific governmental activities.

Agricultural Bank of China

The Agricultural Bank of China is a major Chinese bank that provides financial services to agricultural, rural, and farmer communities, with the aim of enhancing China's agricultural economy and rural development.

Alaska Permanent Fund Dividend

The Alaska Permanent Fund Dividend is an annual payment made to Alaska residents that meets eligibility criteria, funded by the profits from the state's oil revenue to distribute wealth from natural resources.

Alberta Heritage Savings Trust Fund

The Alberta Heritage Savings Trust Fund is a sovereign wealth fund established by the Alberta government to manage and invest the surplus revenues from the province's oil and gas resources for future generations.

Alerts

In finance, alerts are notifications sent to traders or investors about significant events or changes in their portfolio or market conditions, helping them make timely decisions based on the latest information.

Algorithmic trading

Algorithmic trading is a method of executing trades using computer algorithms based on predefined criteria, without human intervention. It capitalises on speed and precision, handling vast amounts of data and executing orders quickly in an attempt to exploit market opportunities across asset classes like shares and forex.Learn more

All in method

The all-in method in finance considers all possible costs and revenues in the analysis or evaluation of a project to ensure all factors are accounted for in decision-making.

Alpha generation platform

An alpha generation platform in finance refers to tools or systems used by traders and investment managers to identify potential investment opportunities that are expected to yield market-beating returns.

Altcoins

Altcoins are cryptocurrencies that propose improvements or differing features and technologies to bitcoin, aiming to address perceived limitations of the most prominent coin.

Alternative asset

An alternative asset is an investment in non-traditional categories such as real estate, commodities, and hedge funds, and can be used to diversify investment portfolios beyond conventional shares.

Alternative display facility

The Alternative Display Facility is an electronic system used in trading to provide exchange services like quote dissemination and trade reporting without providing a full trading venue.

Alternative Investment Fund Managers (AIFM) Directive 2011

AIFM stands for Alternative Investment Fund Managers, referring to managers who handle funds investing in assets including real estate, hedge funds, and private equity.

Alternative public offering

An alternative public offering (APO) is a method for private companies to become publicly traded by merging with an existing public shell company, an alternative to traditional initial public offerings.

Alternative trading system

Alternative Trading Systems (ATS) are trading venues that match buyers and sellers to find counterparties for transactions, alternative to traditional exchanges, often used for trading stocks or bonds.

Alternext

Alternext is a subsidiary market by the stock exchange Euronext designed for small and mid-sized companies that do not meet the regulatory listing requirements of the main stock exchange, providing a potentially easier access point to capital markets.

Altman Z-score

The Altman Z Score is a formula used to predict the likelihood of a company entering bankruptcy within two years, based on various corporate income and balance sheet values.

American depositary receipts (ADRs)

American Depositary Receipts (ADRs) are certificates issued by US banks representing shares in foreign companies, allowing these shares to be traded on US stock exchanges.

American National Standards Institute (ANSI)

The American National Standards Institute (ANSI) is an organisation that oversees the development of standards for products, services, processes, and systems in the US.

Amex Composite Index

The Amex Index refers to a series of stock market indices on the NYSE American, which lists small to medium-sized US and international companies, providing a benchmark for their performance.

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Amex Gold Miners Index

The Amex Gold Miners Index is a stock market index that tracks the performance of major companies involved in the gold mining industry, traded on the NYSE American exchange.

AMX index (Midcap)

The AMX Index is a Dutch stock market index that tracks the performance of mid-cap stocks on the Euronext Amsterdam, providing a benchmark for their economic health.

Ancillary Revenue

Ancillary revenue refers to the income derived from goods and services that complement primary business operations, such as baggage fees for airlines or maintenance services for equipment manufacturers.

Angel Investor

An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity, typically focusing on early-stage ventures.

Animal spirits

In finance, animal spirits refer to the emotional and psychological factors that drive traders’ decisions, leading to fluctuations in financial markets beyond what would be expected from rational behaviour.

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Annual equivalent rate (AER)

The annual equivalent rate (AER) is a re-calculation of the rate of interest on a loan or other debt product to give the figure as it would be if it were calculated annually. This is valuable for consumers with debts where interest is worked out monthly or quarterly.

Annual general meeting (AGM)

An annual general meeting (AGM) is a yearly gathering of a company's interested shareholders that allows stakeholders to receive updates on the company's health and ask questions to the board of directors.

Annual percentage rate (APR)

The annual percentage rate (APR) is a detailed measure of the cost of borrowing on an annual basis. It includes interest and any additional fees or charges, making it a key indicator for comparing different loans and credit terms.

Annual Percentage Yield

The annual percentage yield (APY) measures the total amount of interest paid on an account, based on the interest rate and the frequency of compounding. It shows how much a deposit will earn in a year.

Annual total return

Annual total return represents a percentage that shows the total gain or loss of an investment over a one-year period, incorporating all sources of investment income including dividends, interest, and capital gains.

Annualized loss expectancy

Annualised loss expectancy, or ALE, is a risk-management metric used to estimate the monetary loss that an organisation can expect within a year due to risks identified in its operations.

Annuities

Annuities are financial products structured to provide a steady income stream, and are typically used as part of retirement strategies. Payments from annuities can be scheduled over a fixed period or for the recipient's lifetime.

Arab Monetary Fund (AMF)

The Arab Monetary Fund is an Abu-Dhabi based regional financial organisation focused on fostering monetary cooperation and financial stability among its member countries in the Arab world.

Arbitrage

Arbitrage refers to when an asset is simultaneously purchased and sold in different markets in an attempt to profit from price discrepancies, exploiting these differences to earn potentially risk-free returns.

Arbitrage betting

Arbitrage betting is a strategy where bets are placed on all possible outcomes of an event at odds that guarantee a profit regardless of the result, often exploiting differences in bookmaker odds.

Arbitrage pricing theory

Arbitrage pricing theory (APT) describes an asset pricing model that predicts the returns of a financial asset based on its exposure to multiple risk factors, and serves as an alternative to the capital asset pricing model, or CAPM.

Articles of incorporation

Articles of incorporation are legal documents filed with a governmental body to legally document the creation of a corporation. They outline the primary purposes, structure, and other essential details of the company.

AScX index (Small Cap)

The ASCX Index tracks the performance of small market cap companies listed on the Euronext Amsterdam, offering a benchmark for the smaller company segment of the Netherlands stock market.

Ask Price

The ask price is the minimum price a seller is willing to accept for an asset. In trading, it's the lowest price you can buy a security, such as a stock or currency.

Asset

An asset refers to any resource with economic value that an individual, company, or institution owns or controls with the expectation that it will provide future financial benefit. Assets can include shares, commodities, real estate, and currencies, many of which can be traded with derivative products such as CFDs.

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Asset allocation

Asset allocation refers to an investment strategy that aims to balance risk and reward by segmenting a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.

Asset Classes

An asset class is a group of securities that behave similarly in the marketplace, are subject to the same laws and regulations, and are typically used together as part of an investment strategy, such as shares, commodities, or indices.

Asset purchase

An asset purchase involves acquiring specific assets of a company rather than its stock. This method allows the buyer to obtain only the parts of the business they want, avoiding unwanted liabilities.

Asset stripping

Asset stripping describes the practice of buying a company and then selling its individual assets separately for a profit, often disregarding the long-term health or viability of the original company.

Asset Valuation

Asset valuation is the process of determining the current worth of a financial asset or company. It might involve methods such as discounted cash flow analysis, comparable company analysis, or using market values for assets like stocks and bonds to establish their fair market value.

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Asset-backed commercial paper program

An asset-backed commercial paper program involves issuing short-term securities, backed by a pool of assets, typically used by companies to meet immediate cash flow needs.

Asset-based approach

An asset-based approach is a method of business valuation that focuses on the value of a company's tangible and intangible assets, rather than its earnings or market position.

Assets under management (AUM)

Assets under management refers to the total market value of the investments that a financial institution or asset manager manages on behalf of clients. AUM can include money, real estate, and other assets that are being actively managed.

Association of the Luxembourg Fund Industry

The Association of the Luxembourg Fund Industry (ALFI) is a professional organisation that represents the interests of the Luxembourg investment fund community, promoting its development while ensuring its members operate within the legal and regulatory framework of the market.

Assurance contract

An assurance contract is a financial arrangement, typically related to insurance, where coverage is provided against certain events in exchange for premiums paid by the policyholder. The term is also used in economics to describe a scenario where a project is funded after a set amount of pledges are secured to ensure its viability.

Athex 20

The ATHEX 20 is a stock market index of the twenty largest companies by market capitalisation listed on the Athens Stock Exchange in Greece. It serves as a benchmark for the performance of the Greek equities market.

Attitude to Risk

Attitude to risk refers to the willingness of a trader to take positions that represent a higher chance of losing their capital. More risk-averse traders prefer lower risk assets that may have less upside but also less downside, while risk-seeking traders accept the higher chance of losing money for more potential upside.

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Auction process

The auction process definition explains a method of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. It’s conducted in a public setting where multiple potential buyers place competitive bids.

Audited account

An audited account is a financial statement that has been examined and verified by an independent auditor. The audit process ensures that the accounts accurately represent the entity’s financial position and comply with relevant accounting standards and regulations. This provides assurance to stakeholders about the accuracy of financial reporting.

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Auditor

An auditor is someone qualified to produce a set of audited company accounts, and is usually an accountant by profession. They have the duty to scrutinise the numbers presented by management and raise questions where there are concerns.

Australian Securities Exchange

The Australia Securities Exchange is the primary securities exchange in Australia, located in Sydney. It hosts the trading of shares and other securities. The related index market, which lists the leading blue-chip Australian companies, can be traded on Capital.com as the Australia 200.

Automated Market-Making (AMM)

Automated market making (AMM) is a type of trading system that uses algorithms to set buy and sell prices, providing continuous liquidity to markets. AMMs determine prices based on trading volume and demand, functioning without traditional human market makers.

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Automated Trading

Automated trading involves the use of computer programs and algorithms to enter and exit trades based on pre-defined criteria and without human intervention, often used to execute orders rapidly and at optimal prices.Learn more

Automated Valuation Model (AVM)

An automated valuation model, or AVM, describes a service that uses mathematical modelling to value properties by analysing various data points, commonly used by real estate industries and lenders for quick property appraisals.

Average accounting return

The average accounting return is a financial ratio that reflects the average profits earned by an investment relative to its initial cost or average book value.

Average accounts receivable

Used by businesses, average accounts receivable is a measure used to determine the average amount of money being owed by customers over a period, typically calculated by averaging the opening and closing balances of receivables over a fiscal period.

Average Daily Trading Volume

Average daily trading volume refers to the average number of shares or contracts traded for a specific security or in a market during a specific period, typically calculated over a day. This figure helps investors gauge the liquidity and activity level of the trading asset, influencing decisions regarding the ease of entering or exiting positions.Learn more

Average Price

Average price is the mean price of a good or service over a specific time period, often used to smooth out price data to see underlying price trends more clearly.Learn more

Average propensity to consume

The average propensity to consume is an economic measure that shows the proportion of total income or total expenditure spent on consumption. It indicates how spending levels change with income levels.

Average propensity to save

The average propensity to save represents the fraction of total income that a person saves rather than uses for consumption. It is calculated as savings divided by total net income.

Averaging Down

Averaging down is an investment strategy that involves buying additional shares of a stock that one already owns after the price has dropped, decreasing the average price per share.

What is gross domestic product (GDP)?

Gross Domestic Product

Gross domestic product (GDP) is arguably one of the most important economic indicators. It measures the performance of economic activity over time and is crucial in accessing economic health of a country. 

Here we take a look at the GDP definition in a lot more detail, including its use cases, calculation methods, what affects GDP, and more. 

Key takeaways

  • GDP is a key economic indicator that measures a country’s overall economic activity. 

  • Its components include consumer and government spending, business investment and balance of trade.

  • Real GDP accounts for inflation, while nominal GDP doesn’t. Meanwhile GDP per capita divides GDP by population size.

  • There are three approaches to how to calculate GDP: expenditure method, income approach and production approach.

  • GDP can be used by traders in fundamental analysis, when watching out for a recession and keeping up-to-date with monetary policy decisions.

  • GDP doesn’t account for economic inequality, sustainability of production and non-market transactions. 

What is GDP?

GDP is a broad monetary measure of a nation’s overall economic activity, valuing all the final goods and services produced in a particular period of time, typically annually or quarterly, within the country’s boundaries. Within each country, GDP is usually measured by a national governmental agency.

Importance of GDP in economics

GDP is considered to be one of the principal indicators in economics, allowing analysts to build a better picture of a nation’s financial situation. A significant change in GDP, whether negative or positive, usually reflects in the stock market.

When the economy is doing well, wages increase and a lower unemployment rate is indicated as businesses demand more labour to meet the growing economic needs. Rising GDP signifies that incomes within the country are increasing respectively as well as consumers purchasing power, and vice-versa. 

GDP has a large impact on nearly everyone within that economic environment. It can affect everything from personal finances to investments to job growth. 

Understanding the GDP of a given nation may be helpful for investors when making any decisions in a particular region. It is also vital when comparing a country's growth rates to find the best international opportunities. For example, an investor may choose to buy shares in companies that are located in a rapidly growing economy in the hope of higher returns.

Understanding GDP components

Commonly, the components of GDP include personal consumer and government spending, business investment and the balance of trade. These are the biggest drivers of the GDP calculation.

GDP components

  • Consumer spending: Also known as personal consumption expenditures, this is the measure of spending on goods and services by consumers. 

  • Government spending:  It’s everything that is spent from a government’s budget within a public sector on items such as education, healthcare, defence, and more, depending on the country. 

  • Business investment: Any spending by private businesses and nonprofit companies on assets to produce goods and services is considered business investment. 

  • Balance of trade: The difference in value between a country’s imports and exports is what constitutes the balance of trade. If exports exceed imports, the country is in a trade surplus. On the contrary, if imports exceed exports, it’s in a trade deficit. 

Real vs nominal GDP

As there are, in fact, a few ways to measure a country's gross domestic product, it is important to know what types of GDP there are. Economists typically use two types of GDP for measurements: nominal and real.

Nominal GDP is a country's economic output, the value of the final goods and services produced in a given year without an adjustment for inflation

Real GDP, on the other hand, is equal to the economic output adjusted for the effects of inflation. It’s calculated using the GDP price deflator, which is the difference in prices between the base and the current years. 

Nominal GDP is usually higher than real GDP as inflation is typically a positive number. Once nominal GDP is higher than real GDP, significant inflation is indicated, and, conversely, when real GDP is higher than the nominal, it indicates deflation in a given economy.

For this reason, economists use an adjustment for inflation to find, what’s called, an economy’s real GDP. By adjusting the output of any given year for the price levels that prevailed in a reference year, also known as the base year, economists adjust GDP for inflation. 

GDP per capita

Another variation from traditional GDP is GDP per capita. It's a measure of a country's output using its GDP and dividing that figure by the population. It works out what the economic output is per person on average.

Economists and politicians will often use this figure to compare the relative performance of different countries.

It can be used to show if the value of goods and services in a particular economy is growing or shrinking over time as it accounts for the variable of changing population size.

GDP per capita can be used as a proxy for living standards as it can approximate average income – but it is a very rough measure. 

One way of thinking about it is to think of the GDP as a cake and the population determines the number of slices you have to cut the cake into – the GDP per capita is the size of the slice. For example, two countries may have a similar GDP but if one has three times the population of the other the same amount has to be shared out among three times as many people as smaller slices of cake. It gives you a relative measure between the two countries.

This figure only gives an average and does not account for the great wealth of a few and the poverty of many.

Calculating gross domestic product (GDP)

GDP can be determined in three different ways. These are the income approach, the expenditure approach and the production approach.

Expenditure approach

The expenditure method is based on the principle that all the products and services must be purchased by somebody. It means the value of the total production output has to be equal to people's total expenditures in buying goods. 

It calculates GDP as the total value of personal consumption expenditure, gross domestic private investment, government spending and net of exports over imports within the economy during a given period.

Here is the formula for calculating GDP in this method:

GDP = C + I + G +NX

C = All private consumption and consumer spending in the economy, including durable goods, nondurable goods, and services.

I = All of a country’s investment in capital equipment, housing, and more.

= All of the country’s government spending, including government salaries, construction, maintenance and spending in public services.

NX = Balance of trade, which is a country’s exports minus imports.

 

Income approach

The income approach is based on the principle that all expenditures in an economy should equal the total income generated by the production of all economic goods and services. 

It calculates GDP as the total income received by all economic entities within the country, in the form of factor income, such as profit, wages, rental income, dividend income and interest income.

When using this method, the GDP calculation formula would be:

GDP = Total national income + Sales taxes + Depreciation + Net foreign factor income

Total national income = Value of total items produced in a country by its residents, and income received by its residents, including government and consumer spending.

Sales taxes: Taxes charged by a government on goods and services sales. 

Depreciation: Any depreciation of the value of assets that occurred in an economy.  

Net foreign factor income:  Income earned by foreign companies or individuals within a country. 

 

Production approach

The production or value-added approach is the most direct of the three. It consists of summing the gross value added of all industries in the country. 

In other words, it calculates GDP as the sum of the value added by all services and goods during their production within the economy during a given period. 

The GDP formula here goes as follows:

GDP = Gross value of output - Value of intermediate consumption

Gross value of output = Value of the total sales of goods and services plus value of changes in the inventories 

Value of intermediate consumption = Value of goods and services transformed or used by the production process. In other words, the wear and tear of assets here is recorded as consumption. 

 

GDP calculation example

For our GDP calculation example, let’s choose the expenditure approach and imagine that we are calculating a quarterly GDP based on the following metrics:

Consumption (C) = $200m

Investment (I)  = $55m 

Government spending (G) = $120m

Balance of trade (NX) = Exports - Imports = $45m - $50m = -$5m 

Following the expenditure formula, the result should be as follows:

GDP = C + I + G +NX = $200m + $55m + $120m + (-$5m) = $370m

Uses of GDP

Here are some of the examples on how gross domestic product can be used by traders:

  • Fundamental analysis of stocks: GDP is considered a high-impact indicator in fundamental analysis and can be handy in evaluating the economic environment a company is operating in that’s likely to influence its performance.

  • Fundamental analysis of forex markets: Foreign exchange (forex) markets tend to reflect the economic dynamics of their corresponding countries, hence GDP readings could be a major driver. 

  • Recession watch: In theory two quarters of negative GDP growth constitutes a technical recession. Hence GDP is highly observed during economic downturns.  

  • Monetary policy: GDP is also watched closely by central banks as it informs their decisions in monetary policy such as whether to rise or cut interest rates, expand or taper bond-buying programmes, and more.

Limitations of GDP 

Although GDP is an important indicator to evaluate economic health of a country, there are a number of factors that GDP does not reflect. For example, GDP does not account for:

  • Income equality: GDP fails to indicate how evenly wealth is distributed in an economy. 

  • Non-market transactions: GDP doesn’t account for any non-market transactions, for example those within a household such as food preparation and child care services. 

  • Sustainability: High production is not always sustainable, and can involve polluting or damaging the environment. GDP does not reflect how sustainable a country’s production is. 

Therefore, to complement GDP analysis, investors and traders may look into alternative metrics such as Human Development Index (HDI), Genuine Progress Indicator (GPI), Happy Planet Index (HPI), and other data such as country sustainability reports and greenhouse gas emissions. 

Conclusion 

Although GDP is a lagging indicator, meaning that it looks at how the economy has already performed, it’s a key tool in a trader’s arsenal. GDP can help traders evaluate the economic health of countries (or regions) where stocks or currencies operate, watch out for recessions, and help understand monetary policy. It's a key indicator in assessing the macroeconomic environment.

The key drivers of GDP are its components: consumer and government spending, business investment and balance of trade, which is the difference between exports and imports.

Traders can use nominal and real GDP, with the latter one including inflationary effects into calculation. There is also a GDP per capita that takes into account a country’s population.

To calculate GDP, a trader can choose between expenditure, income and value-added approach.

There are, however, limitations of GDP as an economic indicator. For example, it doesn’t reflect the level of inequality, sustainability of production and doesn’t account for non-market transactions.

FAQs

What affects GDP?

GDP is affected by its key components: consumer and government spending, business investment and balance of trade, which is the difference between exports and imports. Any change in those components would have an impact on the final GDP calculation.

What is a simple definition of GDP?

GDP is an indicator of a nation’s overall economic activity, valuing all the final goods and services produced in a particular period of time, typically annually or quarterly, within the country’s boundaries.

Which country has the highest GDP?

In 2022, the countries with the highest GDP were the US, China, Japan, Germany and India.

Is a high GDP good?

A high GDP means that the economic activity in the country is high, however it should be seen in the context of the population size through GDP per capita, and other indicators such as equality and sustainability indices. It’s also important to evaluate the GDP trend over time - whether it’s growing or declining, and keep in mind the difference between nominal and real GDP.

What is GDP used for?

GDP can be used to evaluate a country’s economic health. It’s a useful indicator in fundamental analysis of stocks and currency markets. It’s also used by central banks and policymakers, and is important when watching out for a recession. 

What are examples of GDP?

GDP of a country measures overall economic activity, valuing all the final goods and services produced in a particular period of time, typically annually or quarterly, within the country’s boundaries. The components of GDP may include spending  by households on final goods and services, such as food, rent, medical care, and automobiles; spending on capital equipment, inventories, and structures, such as factories, machinery, homes, and office buildings, and more. In the US, for instance, the GDP was worth $23.315 trillion in 2021, according to the World Bank.