What is gross domestic product (GDP)?

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What is gross domestic product (GDP)?

Gross domestic product is an important indicator of economic strength. It is a measurement of the cost of all the goods and services produced by a country measured quarterly and yearly.

How is GDP calculated?

GDP = Private consumption + government spending + country investment + (exports – imports)

Understanding how GDP is calculated isn’t too important as long as you understand that GDP is the measurement of the economys strength and productivity.

How does GDP effect the economy? 

GDP needs to have a steady growth meaning the economy is growing at a healthy pace. If GDP is increasing too fast this could cause problems for the economy, an economy growing too fast is highly likely to cause inflation concerns. A GDP declining also causes harm indicating possible a  recession. An ideal growth rate is approx 2.5%.

How does this effect the currency value?

GDP can cause big moves in a currency. A rising GDP will increase a currency value due to possible inflation leading to interest rate hikes and a increased demand for the currency. A lower GDP will cause a decrease in the demand for the currency due to possible recession and interest rate cuts to stimulate economic growth.

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