Understanding GDP
While typically calculated on an annual basis, GDP data is also released quarterly, and it is these releases upon which markets place the most emphasis, given their relatively timely nature. Although GDP figures are constantly being revised (often for many years after the initial estimate has been released), it tends to be the initial estimate which causes the most significant market impact, with any revisions typically relatively minor in nature.
Upon release, the figures are typically represented as a percentage change in both QoQ and YoY terms, signifying the GDP growth/contraction over the quarter in question, with the QoQ figure often the more impactful figure in terms of resulting market volatility. Of course, two consecutive quarterly contractions (represented as a decline in GDP growth) results in what economists define as a technical recession.
GDP is typically calculated via the income method, which uses the following formula:
GDP = C + I + G + (X-M)
Where:
- C = consumer spending
- I = business investment
- G = government spending
- (X-M) = net exports (i.e. exports - imports)
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