What is GDP? Why must investors follow this economic indicator?

Why should investors care about GDP?

As an investor, you may often hear news like “GDP data released.” This is not casual talk, as GDP directly affects your investment returns. Whenever GDP data is released, the stock, bond, and even cryptocurrency markets experience fluctuations. Simply put, the health of GDP determines market sentiment, and market sentiment determines the rise and fall of your account.

What does GDP actually represent?

GDP, short for Gross Domestic Product, is the most important indicator of a country's economic performance. It reflects the total market value of all final goods and services produced within a country's territory during a specific period (usually a year or a quarter). In other words, GDP is a “health report” of a country's economic size.

Whether it's the products of car manufacturers, the services of barbershops, or the medical expenses of hospitals, as long as money exchange is involved, it counts towards GDP. This means that GDP covers all aspects of the operation of the economic system.

Three Methods of Calculating GDP

Economists typically approach GDP calculation from three different perspectives:

1. Production Perspective (Production Method) Add up the value of goods and services created by all industries over a specific period. This approach looks at the economy from the perspective of “what was produced.”

2. Allocation Perspective (Income Approach) The total income of society is calculated, including wages, corporate profits, rents, and taxes, etc. This method looks at the economy from the perspective of “who earns the income.”

3. Expenditure Perspective (Expenditure Method) Add up the expenditures of everyone (consumers, businesses, governments) and then add net exports (exports minus imports). This method looks at the economy from the perspective of “where the money is spent.”

Although the calculation methods are different, the total GDP value obtained by the three methods should be equal, which is referred to as “three-factor balance”.

How GDP Data Affects Financial Markets?

This is the part that investors care about most. The relationship between GDP and financial markets is bidirectional:

When GDP rises: Economic expansion means enhanced profitability for businesses and increased purchasing power for consumers. At this time, investor confidence is high, and funds flow into the stock market, bond market, and even the cryptocurrency market. Asset prices generally rise, which is referred to as the “risk asset up” phase.

When GDP declines: Economic contraction signals pressure on corporate profits and a decrease in consumer demand. Investor panic spreads, leading them to sell off risky assets and shift towards cash or safe-haven assets. Stock prices fall and cryptocurrency prices plummet are often associated with the deterioration of GDP.

In fact, many cryptocurrency investors have found that macroeconomic data (especially GDP data) often has a stronger predictive ability for the cryptocurrency market than technical analysis.

Why is GDP the “barometer” of the economy?

The growth rate of GDP directly reflects the health of an economy. Sustained GDP growth indicates that the economy is expanding, the unemployment rate may decrease, and wage levels may rise. Conversely, a continuous decline in GDP often signals an economic recession, which may lead to rising unemployment and weak consumption.

For policymakers, corporate executives, and investors, GDP data serves as a key reference for making significant decisions. Will the central bank cut interest rates? Will companies expand their investments? Will investors increase their risk exposure? These decisions all rely on the guidance of GDP.

Summary

GDP is the foundation for understanding the operation of the economy. It not only tells us the size of a country's economy but also influences corporate profits, consumer expectations, and policy directions, thereby affecting the trend of the entire financial market. For cryptocurrency investors, paying attention to macroeconomic indicators such as GDP can help better grasp market cycles and make more rational investment decisions. In short, to remain invincible in the financial market, understanding the meaning and impact of GDP is a prerequisite.