What does GDP stand for? Why does this indicator affect the stock market?

When opening today’s economic news, we will encounter the term GDP in reports, data, or analyses. For new investors, it might be confusing why this number can cause the SET Index to fluctuate so much. The answer lies in the relationship between GDP and the country’s business activities. Today, we will uncover the mystery of this most important economic indicator.

What is Gross Domestic Product?

GDP stands for Gross Domestic Product, which represents the total value of all finished goods and services produced and sold within the country during a specified period. It is generally calculated annually, but sometimes it is computed quarterly to provide a clearer picture of growth rates.

Since GDP reflects the total production volume of a country, it is considered a thermometer of economic health. When GDP increases, it indicates economic growth; when GDP decreases, it may signal a risk of recession.

What does GDP consist of?

The calculation of GDP uses the formula: GDP = C + G + I + NX, where each variable means:

1. C - Private consumption

Consumer spending on goods and services, which is the largest component in GDP calculation. When consumers are confident and willing to spend more, the economy tends to grow.

2. G - Government spending

This includes government expenditures on infrastructure, tools, and civil servant salaries. During economic downturns, the government often increases spending to stimulate growth.

3. I - Investment by the private and public sectors

Businesses invest in machinery, facilities, and technology. These investments help increase production capacity and create new jobs.

4. NX - Net exports

Calculated as exports minus imports (NX = Exports - Imports). When a country exports more, GDP increases.

The difference between Nominal GDP and Real GDP

Nominal GDP - Unadjusted for price changes

Nominal GDP is calculated based on current prices of goods and services in that year, without subtracting inflation. It is mostly used for comparing data within the same quarter or year.

Real GDP - Adjusted for inflation

Real GDP is adjusted to a base year’s prices to remove the effects of inflation, providing a true picture of growth. Analysts often use Real GDP when comparing GDP across different years.

For example, if prices increase by 5% since the base year, the deflator will be 1.05. Dividing Nominal GDP by this number yields Real GDP, reflecting actual growth.

Why is GDP important to the stock market?

The relationship between GDP and the stock market is clearly interconnected. All companies listed on the stock exchange generate revenue within the country, which is a key component of GDP.

When GDP increases, it means the country’s economic activities are expanding. Many companies perform better, profits rise, and stock prices can go higher. Conversely, when GDP declines, it indicates reduced consumer confidence, lower sales, and decreased profits, which can put downward pressure on the SET Index.

Investors closely monitor GDP data because it helps them forecast market directions and adjust their portfolios accordingly.

Summary

GDP stands for Gross Domestic Product, an essential economic indicator for understanding the country’s economic condition. Although GDP does not provide a complete picture of the entire economy, it is a valuable tool for policy planning and investment decisions.

For investors, tracking GDP data and its changes is crucial because it directly impacts corporate performance and the movement of the SET Index. To analyze the market more deeply, it is recommended to study GDP alongside other economic indicators to gain a clearer picture and make informed investment decisions.