Gross Domestic Product (GDP)
Simply put, gross domestic product (GDP) gauges the size and health of a country’s economy. GDP represents the total dollar value of all goods and services produced over a specific time period. GDP is calculated in two ways: The income approach and the expenditure method. The income approach adds up what everyone (companies and people) earned in a year, and the expenditure method adds up what everyone spent (roughly similar numbers).
Knowing a country’s GDP is important because it allows people to compare the sizes of different countries. The European Union, as a whole, now has the largest GDP in the world. The U.S. is number two, with a 2008 GDP of $14,580,000,000,000. China is also right behind the U.S. at number three now, with a GDP of $7,800,000,000,000. According to these GDP numbers, the United States produces almost two times as many goods and services than China in 2008. Obviously, these GDP numbers will be huge, as they account for all of the goods and services produced in a country throughout an entire year.
But, GDP is also very useful in determining the health of a country. By comparing a country’s GDP yearly or quarterly trends, one can learn a lot about the country’s economic situation. For example, if the year-over-year GDP increases by 5%, that is interpreted to mean that the economy has grown by 5% compared to the previous year. When a country’s GDP increases at a higher rate than the period before, it usually signifies a growing economy. In a growing economy, the unemployment rate is usually low as more businesses are thriving and hiring more people. But, if a country’s GDP declines compared to the previous period, it means that the country’s economy is shrinking. For example, U.S. GDP fell 3.8% in the 4th quarter of 2008. As most of you know, our economy is shrinking, people are losing jobs, and we are in a recession. A recession is actually defined as two consecutive quarters of negative growth in GDP. The U.S. had a declining growth rate of -.5% in the 3rd quarter of 2008 as well, which explains why everyone says we are now officially in a recession.
How does a change in GDP affect the stock market? As you can imagine, a shrinking GDP will have an adverse affect on the markets, as businesses and people are producing and spending less than the period before. An increase in GDP will have positive affects on the markets, as businesses are growing and increasing profits and consumers are spending more.
Knowing what GDP is and understanding how GDP trends affect the stock market are crucial concepts for any investor to understand.
Niki Pezeshki
College Trillionaire
Posts
Love the website guys, it's great to have a clear-cut analysis of specific stocks to spark up interest and my own research. I recently put some money in Activision and Foster & Wheeler (kind of split it with Jacobs Engineering also).
ReplyDeleteI don't know if you guys take requests but I've been researching Cash America (CSH), Ticketmaster (TKTM), and Cedar Fair (FUN).
Cash America just expanded to include small credit to costumers along with expansion of stores into Mexico (avoiding high state int. rates), but Obama's plan may raise interest rates.
Ticketmaster is most likely going to be merged with LiveNation soon, mergers sometimes take forever (XM/Sirius) but once they do merge it'll become a true powerhouse. The stock recently plummetted, probably due to low expectations and the slowing down of the merger, is this a good long-term buy?
Cedar Fair, amusement parks, seems like a bad investment due to the nature of their business, clearly not as diversified as Disney, and then the massive debt they incurred in 2006 with the purchase from paramount. But then again they offer great dividends (about 13-14%) and have recently posted positive earnings for spring and summer... hopefully even better in the spring/summer 2009 as market confidence picks up. If were in for a longer haul, this company is sure to pick up in the long-run and the stock is cheap now.
Hey,
ReplyDeleteI am definitely very interested in Ticketmaster, and it will be one of the Stocks of the Day for next week. I will also look into Cedar Fair, but I do not know much about it right now. So, keep reading next week and look for our article on Ticketmaster. Also, I think both Foster Wheeler and Activision are some great picks, and should work out very well in the long term.