How to use Gross Domestic Product GDP in forex trading analysis ?



Gross Domestic Product (GDP) is one of the essential indicators that are used to measure the economic performance of a particular country. It interprets the health of a particular economy, hence it describes that whether the economy is performing well or not. By definition GDP represents the total monetary value of all final goods and services produced within national boundaries of an economy. Generally GDP is said to represent the size of the economy under study. Though GDP is a monetary measurement but mostly it is used in relative terms. By relative terms it is meant that it is presented as percentage change with comparison to previous year. As GDP depicts the value of the total production, total income and total expenditures, therefore it can be concluded that GDP indicates the standard of living prevailing in a particular economy.

A positive percentage change in GDP indicates that as compared to the previous fiscal year the GDP has recorded growth. Economists infer that a 6% growth per year can be ranked as an ideal growth for GDP. It is important to know that if GDP growth rate is aligned with exact proportion of population increase then that growth will be discarded. Similarly GDP growth rate is calculated with proportion to inflation and deflation. Though the calculation of GDP involves complex measurement but at its simple calculation it can be calculated by using two different approaches. The income approach counts the total earnings of the residents during a given year. The expenditure approach states that GDP can be calculated by adding total spending during a given year. Both income and expenditure approach must reveal same results for a given year. The components of income approach include; compensation of employees, gross profit made by both incorporated and corporate companies and total taxes earned by government. Whereas, the components of expenditure approach include; total consumption, total investment, govt. expenditures and export minus imports (net exports).

GDP also directly affects the currency of an economy. Currency value of a country is directly related to its GDP. Therefore the measurement and analysis of GDP is very important for FOREX traders. FOREX traders use to carry out cross country comparison of countries in order to determine the health of currency. If GDP is experiencing a positive growth with respect to population growth and inflation rate then we can infer that the value of currency for that country would also go up.