Gross Domestic Product is important Forex economic indicator in Forex fundamental analysis it it major drive factor of economy of nation.
Gross Domestic Product Brief
- GDP refers to the total value of all goods and services produced within a country within a given period. GDP is a measure of production in a country. If GDP is going up production is going up and the country is experiencing economic growth. GDP is a lagging indicator released quarterly.
- Raising GDP is a positive sign for the economy, this is as rising GDP signals growth and as the economy grows there is increased inflation remember the main tool used by central banks to control inflation is raising interest rates.
- Higher interest rates make money more expensive to borrow and thereby reduce spending by those who produce goods and services. Lowering interest rates have the opposite effect.
Gross Domestic Product Described
GDP refers to the total value of all goods and services produced within a country within a given period. Now GDP is a measure of production in a country. So, if GDP is going up, production is going up and the country is experiencing economic growth. Now, GDP is a lagging indicator and is released quarterly. Now, what I mean by lagging indicators that you will see a change in GDP after changes already occurred in the economy. So, GDP is not a leading indicator leading indicators signals change before change occurs. And examples of leading indicators are like PMI consumer price index, but GDP is a lagging indicator you so you’d always see a change in GDP after there’s a change in the economic and GDP comes out quarterly that is every three months of the year. So always bear in mind that GDP is a lagging indicator, and it comes out on a quarterly basis.
Now, rising GDP is a positive sign. Why is rising GDP a positive sign? This is as rising GDP signals growth and as the economy grows, there is increased inflation. Remember, the main tool used by central banks to control inflation is raising interest rates. So rising GDP is positive for currency. So if we see a rise in GDP for the Euro, you can expects trends in the euro. This is because rising GDP signals economic growth.
higher interest rates make money more expensive to borrow and thereby reduce spending by those who produce goods and services. And therefore central bank raised interest rates to come back increase in inflation. This is because when the central bank raises interest rate, it makes money more expensive to borrow. And when money is more expensive to borrow, there’s less spending and less spending leads to less demand and less demand leads to lower prices. So, this is the effect that raising interest rates has also, more persons feel the urge to save and invest in long term investments. This is because there is more interest to be gained under savings and more interest to be earned on your long-term investments.
There’s an increase in purchasing of government bonds and fixed income investments. So, so I interest rates make money more expensive to borrow, and as a result decreases the circulation of money in an economy. Okay, and lowering interest rates as the opposite effect, lowered interest rate makes money cheaper to borrow. And as a result, more persons borrow money, and there’s more spending. And as there’s more spending, there’s more demand because more persons have money to spend. So more persons are willing to purchase goods and services and as a result, the price of goods and services increases so, so this is the effect of raising and lowering interest rates. No, in the next lecture, we’ll be looking at the non-farm payrolls.
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