Why must investors understand what GDP is?

GDP Determines Where to Invest Your Money

GDP, or Gross Domestic Product, sounds complicated, but essentially it is a measure of a country's economic “productivity”. In simple terms, what is GDP? It is the total value of all goods and services produced and sold by a country within a specific period (usually a year or a quarter). From mobile phones and cars to dining and healthcare, as long as someone pays for it, it counts towards the GDP.

This figure is crucial for investors because GDP directly reflects whether the economy is rising or falling. When GDP grows, it means that corporate profits are increasing and consumption is warming up. At this point, investors are usually more confident and willing to invest in stocks, bonds, or even cryptocurrencies. Conversely, when GDP declines, the economy may face recession or stagnation, and investors' risk appetite will significantly decrease, ultimately leading to a wave of asset sell-offs.

How is GDP calculated? Each of the three methods has its own merits.

To understand what GDP is, one must also know how it is calculated. Economists use three methods to calculate GDP:

Production Method: Calculate the value of goods and services produced by all industries, and then sum them up. This method starts from the supply side, looking at how much the economy can produce.

Income Approach: Add up all the money earned by individuals and businesses, including wages, profits, rents, and taxes. This method looks at economic output from the perspective of distribution.

Expenditure Method: Summarizes all expenditures, including consumer purchases, business investments, and government spending, plus exports minus imports. This is the demand-side view of the economy.

The results calculated by these three methods should be consistent and collectively reflect the overall scale of a country's economy.

The state of GDP directly affects the financial market

The key to understanding what GDP is lies in recognizing how it affects your assets. During periods of rising GDP, corporate profitability increases, consumer demand is strong, and the stock and cryptocurrency markets often experience upward trends. Investors, optimistic about the economic outlook, tend to actively increase their positions.

However, a decline in GDP presents a different picture. Weak economic growth means that corporate revenues may decline, and consumers will tighten their belts. At this time, investor sentiment reverses, leading to a massive sell-off of stocks and digital assets, and cryptocurrency prices often follow suit with a drop. Many sharp declines in the market often occur when GDP data falls short of expectations.

GDP Data, a Barometer for Investment Decisions

Whether you are a traditional investor or a cryptocurrency trader, GDP data should be a key focus for you. Governments formulate economic policies based on GDP, businesses adjust their investment plans according to GDP expectations, and investors allocate assets based on GDP trends.

From this perspective, a deeper understanding of what GDP is can not only help you see the economic situation clearly, but also assist you in making more informed investment decisions in the rapidly changing financial markets. GDP is like a “thermometer” for the economy; a high temperature indicates that the economy is “running a fever” (overheating), while a low temperature suggests that the economy is “chilly” (recession). What investors need to do is adjust their investment strategies according to this temperature.