Gross Domestic Product (GDP)

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What is Gross Domestic Product?

GDP is the acronym name for Gross Domestic Product, and it measures the overall country’s economic health based on the monetary value output of finished goods and services generated within a defined period.

GDP is commonly measured in three different time-period known as monthly (m/m), quarterly (q/q), and yearly (y/y).

When the GDP indicates that the country’s economy is healthy, it is commonly observed that the unemployment rate is low and employees having higher salaries as businesses demand manpower to supply the needs of the growing economy.

What does GDP value measures?

The GDP value comprises of four main categories known as consumption, investment, government expenditure, and net exports.

Consumption refers to consumer daily private expenditure such as housing, transportation, food, entertainment, appeal, etc. Consumer expenditures have the largest influence on the country’s economy. One example would be the US as it accounts for two-thirds of the US GDP.

Investment refers to private domestic or business investment. Usually, business investment plays a bigger role in the country’s economy as it increases employment through the expansion of businesses.

Government expenditure refers to the government injecting liquidity into the country’s economy to purchasing equipment, building infrastructure, and payroll. Government expenditure is critical during times of a recession as it prevents an economy from collapsing when consumer spending and investment declined sharply.   

Net exports refer to the calculated value of exports subtracting imports within an economy. Naturally, it is important to have high export value than import value as it dictates the amount of money flowing in and out of a country.

How to trade the US GDP news release?

Before trading the US GDP news release, it is important to take note that there are 3 different versions of GDP new release known as the advanced (q/q), preliminary (q/q), and final (q/q).

Within the 3 versions of GDP, the advanced GDP is released 30 days after the quarter ends, the preliminary is released 60 days after the quarter ends and the final GDP is released 85 days after the quarter ends. Usually, the advanced GDP new releases have the highest impact followed by preliminary GDP and final GDP.

On top of knowing the different versions of GDP, forex traders must also beware when trading the US GDP as sometimes the price might be half or already priced in. This may result in lesser volatility than expected.

The following three examples shown below are some of the possible outcomes when trading the US GDP news release based on the USD/CAD chart, H1 timeframe.

Example 1: When US GDP value released is better than forecast.

On the 22nd of Dec 2020, the Final GDP q/q (2130hrs, SGT) indicates that the actual final GDP number is better than the forecast and previous. On the USD/CAD chart, H1 timeframe, the price candle moved upwards reflecting the strengthening of the US dollars based on the positive GDP number. 

Example 2: When US GDP value released is worse than forecast.

On the 29th of Apr 2020, the advance GDP q/q (2032 hrs, SGT) indicates that the actual advance GDP number is worse than forecast and previous. On the USD/CAD chart, H1 timeframe, the price candle moved downwards reflecting the weakening of the US dollars based on the negative GDP number. 

3 Key Points to take away from this article

1. GDP may be represented in 3 different time-period such as monthly, quarterly, and yearly.
2. The US GDP may be represented in 3 different versions known as advanced, preliminary, and final.
3. It is important to be aware that the price might be half or already priced in which may result in lesser volatility than expected.