Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is "GROSS DOMESTIC PRODUCT (GDP)"
Gross Domestic Product is commonly referred to as GDP. The GDP is one of the primary indicators
used to gauge the health of a country's economy. It represents the total dollar value of all
goods and services produced over a specific time period - you can think of it as the size
of the economy. Usually, GDP is expressed as a comparison to the previous quarter or
year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the
economy has grown by 3% over the last year. As one can imagine GDP has a large impact
on nearly everyone within that economy. For example, when the economy is healthy, you
will typically see low unemployment and wage increases as businesses demand labor to meet
the growing economy. A significant change in GDP, whether up or down, usually has a
significant effect on the stock market. It's not hard to understand why: a bad economy
usually means lower profits for companies, which in turn means lower stock prices. Investors
really worry about negative GDP growth, which is one of the factors economists use to determine
whether an economy is in a recession. Measuring GDP is complicated which is why
we leave it to the economists, but at its most basic, the calculation can be done in
one of two ways: either by adding up what everyone earned in a year called the income
approach, or by adding up what everyone spent known as the expenditure method. Logically,
both measures should arrive at roughly the same total.