Archive for December, 2009
Interpreting the GDP report: How to make sense of the numbers.
Interpreting the GDP report: How to make sense of the numbers.
If you trade forex, you already know that the GDP report is one of the most appreciated pieces of information in the marketplace. It is comprehensive, provides a picture of national economic activity on a meaningful time frame, and has important implications for such variables as the unemployment rate, central bank rates, and inflation. We do not pretend that the small space of this page will allow us the chance to make a detailed exposition on the subject, but we do aim to present a few salient points of the report as they relate to trading decisions, and market trends.
The GDP report provides a snapshot of all economic activity that take place inside the borders of a nation. Any economic activity that in some way leads to the production of goods or services is included in the report. If a foreign firm employs workers in the U.S., for example, the products created by U.S. workers will be accounted for in the report. On the other hand, if an American firm operates one hundred factories outside in Mexico, and generates billions of dollars in income from its activities there, none of it will be made a part of the GDP report, since no production takes place inside the national borders.
The GDP report is not generally regarded as a forward-looking indicator, and indeed, few of the information contained in it has a great degree of relevance for the future dynamism of the economy. On the other hand, no one has a crystal ball that can show the future, so central bank authorities include the information presented by this report in their evaluation of inflationary pressures. In particular the GDP deflator is an important piece of data that tells us how much price pressure is generated by domestic production. It differs from the CPI in that it does not account for import prices. By looking at this indicator, economists can isolate the domestic portion of the inflation spectrum, which can then help them decide the impact of currency fluctuations on price rises at home.
The GDP report accounts for all production in a country, but it only calculates the values of final goods. In other words, the report does not calculate the number and dollar value of tires, car motors, but only measures the dollar value of automobiles created by domestic industries. As a result, it provides a compact, yet detailed overview of national economic activity.
The GDP report is one of many economic indicators, and it must be taken in the context of other indicators that contribute to the big picture as it exists in reality and in the minds of traders. By familiarizing yourself with the GDP number and its details you may gain a significant edge over traders who are ignorant of its meaning and significance. This particular indicator is relatively straightforward, and if you are a trader, there is no justification for not studying and comprehending it to the maximum extent possible.