Gross Domestic Product (GDP)

What is gross domestic product?

Gross domestic product (GDP) is the most widely used measure of an economy's performance over a given period. It captures the market value of all final goods and services produced within a country's borders. Only final products count, so intermediate inputs – such as the steel in a car – are not counted twice. GDP is not the same as gross national product (GNP), which measures the income of a country's residents wherever it is earned.

How GDP is measured and reported

GDP is measured and published quarterly and annually by statistical agencies – in the US by the Bureau of Economic Analysis (BEA), for the euro area by Eurostat. Markets focus on real GDP growth, which is adjusted for price changes: if nominal GDP rises by 5% while prices rise by 3%, the economy has grown by roughly 2% in real terms.

The US states quarterly growth as an annualised rate, while the euro area reports the change against the previous quarter, so a quarterly rise of 0.5% corresponds to roughly 2% annualised. First estimates are often revised as more data become available. Two consecutive quarters of falling real GDP are a common rule of thumb for a recession.

Why GDP matters for traders

GDP releases can move currencies, stock indices and bonds, especially when the figure differs from forecasts. Stronger-than-expected growth tends to support a currency because it makes higher interest rates more likely; a disappointment can weigh on it. For traders, this calls for extra caution shortly before the release. Open positions – in currency pairs, for example – can be protected by partly closing them or by using tight stop-loss orders. In fast markets, however, prices can gap and stops may be filled at a worse price than set, so careful risk management is essential.