What kind of variable is gdp

It is widely followed and discussed by economists, analysts, investors, and policy-makers. The advance release of the latest data will almost always move markets, although that impact can be limited, as noted above. Investors watch GDP since it provides a framework for decision-making. Comparing the GDP growth rates of different countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing economies abroad—and if so, which ones.

One interesting metric that investors can use to get some sense of the valuation of an equity market is the ratio of total market capitalization to GDP , expressed as a percentage. Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade at market-cap-to-GDP ratios that are literally all over the map.

For example, according to the World Bank, the U. However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an example, the U.

In retrospect, these represented zones of substantial overvaluation and undervaluation, respectively, for U. The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantly alter the percentage change in GDP. The concept of GDP was first proposed in in a report to the U. At the time, the preeminent system of measurement was GNP. After the Bretton Woods conference in , GDP was widely adopted as the standard means for measuring national economies, although ironically, the U.

Beginning in the s, however, some economists and policy-makers began to question GDP. In other words, these critics drew attention to a distinction between economic progress and social progress. There are, of course, drawbacks to using GDP as an indicator. In addition to the lack of timeliness, some criticisms of GDP as a measure are:. The World Bank hosts one of the most reliable web-based databases.

It has one of the best and most comprehensive lists of countries for which it tracks GDP data. The only drawback to using a Fed database is a lack of updating in GDP data and an absence of data for certain countries. Department of Commerce , issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release. Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living.

Due to various limitations, however, many economists have argued that GDP should not be used as a proxy for overall economic success, much less the success of a society more generally. However, their ranking differs depending on how you measure GDP. Many economists, however, argue that it is more accurate to use purchasing power parity PPP GDP as a measure for national wealth.

Most people perceive a higher GDP to be a good thing because it is associated with greater economic opportunities and an improved standard of material well-being.

It is possible, however, for a country to have a high GDP and still be an unattractive place to live, so it is important to also consider other measurements. For example, a country could have a high GDP and a low per-capita GDP , suggesting that significant wealth exists but is concentrated in the hands of very few people. They liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent.

GDP enables policy-makers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon. Like any measure, GDP has its imperfections. In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity.

Means of calculating GDP have also evolved continually since its conception to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of intangible assets. Federal Reserve Bank of St.

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Real World Economies. Economy Economics. Table of Contents Expand. Understanding GDP. Types of GDP. Ways of Calculating GDP. GDP vs. GNP vs. Adjustments to GDP. GDP and Investing. Samuelson and economist William Nordhaus put it:. GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or needs to be restrained, and if threats such as a recession or rampant inflation loom on the horizon.

The national income and product accounts NIPA , which form the basis for measuring GDP, allow policymakers, economists, and businesses to analyze the impact of such variables as monetary and fiscal policy , economic shocks , such as a spike in the oil price, and tax and spending plans on specific subsets of an economy, as well as on the overall economy itself.

Along with better-informed policies and institutions, national accounts have contributed to a significant reduction in the severity of business cycles since the end of World War II. GDP can be calculated either through the expenditure approach—the sum total of what everyone in an economy spent over a particular period—or the income approach —the total of what everyone earned. Both should produce the same result. A third method, the value-added approach, is used to calculate GDP by industry.

Expenditure-based GDP produces both real inflation-adjusted and nominal values , while the calculation of income-based GDP is only carried out in nominal values. The expenditure approach is the more common one and is obtained by summing up total consumption, government spending, investment, and net exports. GDP fluctuates because of the business cycle.

When the economy is booming, and GDP is rising, there comes a point when inflationary pressures build up rapidly as labor and productive capacity near full utilization. This leads the central bank to commence a cycle of tighter monetary policy to cool down the overheating economy and quell inflation.

As interest rates rise, companies and consumers cut back spending, and the economy slows down. Slowing demand leads companies to lay off employees, which further affects consumer confidence and demand.

To break this vicious circle, the central bank eases monetary policy to stimulate economic growth and employment until the economy is booming once again. Rinse and repeat. Consumer spending is the biggest component , accounting for more than two-thirds of the U. Consumer confidence , therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend.

Business investment is another critical component of GDP since it increases productive capacity and boosts employment. Government spending, too, assumes particular importance as a component of GDP when consumer spending and business investment both decline sharply, as, for instance, after a recession. Some criticisms of GDP as a measure of economic output are:. Discussions about GDP growth invariably turn to the torrid pace of growth recorded by China since the late s and India from the s, following revitalizing economic reforms.

Smaller nations such as the Asian Tigers —Hong Kong, Singapore, South Korea, and Taiwan—had already achieved rapid economic growth from the s onward by becoming export dynamos and focusing on their competitive strengths.

While the emerging market and developing nations have been growing at a faster pace than the developed world since the s, the divergence in growth rates has begun to narrow since the end of the Great Recession in early For instance, in developing countries collectively recorded GDP growth of 6.

By , that gap tightened, with developing countries' collective GDP shrinking to 3. Understandably, the prognostications were grim as they noted that:. The report goes on to state:. Effective mitigation is expected to see the global economy recover to 3. However, a longer-lasting coronavirus outbreak and spread, especially throughout the Asia-Pacific region, Europe and North America could see global GDP:. The largest and best-run companies in these countries will be among the biggest beneficiaries of long-term economic expansion.

Most nations release GDP data every month and quarter. If the share of these activities varies over time, then economic fundamentals such as human capital may only explain parts of measured GDP growth.

For example, strong growth rates in many Asian economies may stem partly from non-market activities becoming market activities and therefore being included in official GDP estimates — which also may help explain why some countries' incomes have converged to the world leader. Unable to display preview. Download preview PDF. Skip to main content. This service is more advanced with JavaScript available. Advertisement Hide. The dependent variable: GDP growth.

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