What is GDP and why does it influence the capital markets?

Investors in the stock market may notice a close relationship between national economic data and changes in the SET Index every time economic statistics are released. Today, we will study how this powerful economic indicator plays a role in the financial system and investment.

Why GDP is Important for Investors

First, we should understand that the performance of the stock market depends on the operating results of listed companies. These companies generate revenue within the country. The growth of this revenue will be reflected in the GDP figures. Therefore, when analyzing the capital market, it is essential to closely monitor national economic statistics.

What Does GDP Mean?

GDP (Gross Domestic Product) refers to the total value of finished goods and services within the borders of a specific country during a given period. This indicator provides an overall picture of the economic condition, including the size and growth rate of that economy. Usually, it is calculated annually, but sometimes data is released quarterly, calculated on a year-to-date basis. For example, in the United States, the government releases an estimated GDP figure and updates it based on price changes to obtain net data after accounting for inflation.

Main Components of GDP

The fundamental formula for calculating the economic system is:

GDP = C + G + I + NX

Consumer Spending (C - Private Consumption)

This part indicates the circulation of money among the population. When consumer confidence is high, people tend to spend more. Since this is the largest component of GDP, observing consumer behavior helps policymakers and investors better understand economic trends.

Government Spending (G - Government Spending)

The government invests in infrastructure, tools, and employment. This expenditure becomes especially important when the private sector or consumers slow down investment and spending, such as during economic recessions.

Private Investment (I - Private Investment)

Companies purchase machinery, equipment, and other assets to expand their operations. Such investments increase production capacity and create employment opportunities, which are key factors in economic growth.

Net Exports (NX - Net Exports)

Calculated as total exports minus total imports. This reflects the country’s competitiveness in the global market, similar to net income from international trade.

There Are Two Types of GDP: Nominal and Real

Nominal GDP - Nominal GDP###

This is the calculation of the value of goods and services using current prices, without adjusting for inflation. Nominal GDP figures can increase simply because prices rise, not because of increased production. Comparing Nominal GDP across different quarters within the same year is useful.

( Real GDP - Real GDP)

This measure adjusts for inflation to show the actual volume of production, using constant prices from a base year. It allows for accurate comparisons of output across different years. The calculation involves dividing Nominal GDP by the GDP deflator Price Index, which is the ratio of current year prices to base year prices.

Generally, Nominal GDP is higher than Real GDP because inflation tends to be positive. An increasing difference between these two figures indicates significant inflation in the economy.

Deeper Meaning of GDP

GDP is viewed as a comprehensive account of the economic condition, indicating the size of the economy and its growth trajectory. However, it is important to remember that GDP does not provide a complete picture of the true economic situation. Nonetheless, it remains a key indicator for policymakers and investors to analyze the situation and develop strategic plans accordingly.

The Relationship Between GDP and the Stock Market

Market analysts must pay attention to GDP because most companies in the stock market depend on the country’s economic growth. When GDP increases, companies usually see higher revenues, leading to increased profits, which in turn move stock prices in the same direction.

Conversely, when GDP declines or grows slowly, companies face challenges in increasing revenue, affecting stock indices. This relationship makes GDP data a crucial metric that investors monitor.

Summary of Key Points

GDP is an essential tool that helps us understand the overall state of the economy and the trends in the financial markets. Although it has limitations, studying and tracking GDP can help investors and monetary policymakers make informed decisions.

In addition to GDP, it is also important to study other economic indicators such as inflation rate, employment rate, and trade statistics to gain a clearer picture for market analysis.