MORE ON GDP

GDP stands for gross domestic product. 

It places a value on all the goods and services created within a country’s borders in a particular period. The GDP tells us how an economy is doing – whether it’s growing or not. It’s probably the most important economic indicator in the world. It’s measured every quarter. 

You can compare how the economy fared from quarter to quarter, or you can look at how the GDP value compares to the same period in the previous year. (This is the one we really care about.) 

If the GDP value is bigger, it means the economy grew. If not, the economy shrank. If the GDP growth rate decreased for two successive quarters, the economy is thought to be in recession. 

The GDP measurement was invented in 1937. The US government commissioned economist Simon Kuznets to devise a single number that reflected the state of the economy. The government, trying to help the economy out of the Great Depression, was getting increasingly frustrated that it had to base policies on sketchy data. 

The formula is quite simple. First private consumption is measured – that means everything we’re buying – for example, cars, property, doctor’s services and food. Information is collected from thousands of shops, manufacturers, service providers and other companies. 

Then all the gross investments are measured. This includes all the money that foreign companies invest in South Africa. 

Next: Government spending, everything from infrastructure to salaries. Then all the imports are deducted from exports. This is very important. Imported goods are not manufactured in a country and can’t be considered as being part of the GDP. 

This “balance of trade” numbers are an important indicator about what’s going on in the economy.

Why is the GDP important to investors? First, a weak economy means companies probably won’t deliver fat profits. This means the companies won’t grow by much and therefore their share prices should also languish. The GDP is also a key indicator of where interest rates may be heading. While the SA monetary authorities officially focus on keeping inflation manageable, a weak GDP number may help to convince them to cut interest rates to support the economy.

Source: Finweek 2 August 2012 Page 35