Trading with Gross Domestic Product (GDP) and Genuine Progress Indicator (GPI)

currency exchange

As a trader in foreign exchange (forex), we are always paying attention on such reports that are crucial for reading the market. Those reports makes instability, and of course, various assumptions. The GDP and GPI reports are two examples of such reports we are going to talk about now.

GDP (Gross Domestic Product) report simply shows the total value of all goods and services produced in a particular country. This data is used to evaluate the economic growth. When the GDP is rising, it means the national economy is running good and vice versa when it’s falling down, the economy is in trouble. GDP can be put side by side to another year’s performance to get a percentage of the GDP.

In the U.S., GDP report can be published on a monthly or quarterly basis by the Bureau of Economic Analysis (BEA). The report contains of four main categories:

  1. Consumption (the total consumption spent by households)
  2. Investment (business spending)
  3. Government expenditures or spending (including employee wages and defense or social programs payback)
  4. Net exports (the higher number, the more productive the economy)

The GDP report has a significant weight for currency traders or investors. There are three basic reactions to price they can expect:

  1. A lower-than-expected GDP reading, will be treated as a signal of a weakening economic condition. Thus, it will lead to the decline in domestic currency.
  2. An expected GDP reading, may be compared to prior report (maybe a quarter’s or even previous year’s report) to gain better assessment of the situation.
  3. A higher-than-expected GDP reading will strengthen the domestic currency against other currencies.

While GDP report is showing an easy-to-read indicator of economic prosperity, there is another report called GPI (Genuine Progress Indicator) report. Some economists say that from the perspective of a citizen day-to-day realities of life, the GDP report fails to explain the situation. That’s why they developed an alternate report to measure the nation’s economic and social health. The GPI measurement tends to be more concern about environmental issues.

Based on the same personal data, GPI provides adjustment factors which involve the non-monetary aspects of the economy. These aspects include below variables:

  1. Personal consumption (the exact same data as used in the GDP)
  2. Income distribution
  3. Housework, volunteering, higher education (labor factors which go into housework and volunteering)
  4. Service of consumer durables and infrastructure
  5. Crime (money spent on outlays effected by crime rising is treated as negative in GPI, whilst GDP views it as a positive spending)
  6. Resource depletion (when GDP views wetlands destruction by economic activities as a positive point, GPI views it as a negative one)
  7. Pollution
  8. Long-term environmental damage
  9. Changes in leisure time
  10. Defensive expenditures
  11. Dependence on foreign assets

The GPI will compute all of above variables into consideration to determine the value. This value will be added or deleted from the GDP figure. For example, consumer spending on durables is treated as a negative adjustment and will be subtracted from the GDP.

Even though GPI tries to give better solution in explaining the economic and social health, it seems to be more focus on how people are making money. That’s why GPI has not yet been globally adopted in such economics. Canada and some of Europe’s small and progressive countries have been using this GPI-type report. But as environmental concerns grows into public’s awareness, other countries may slowly implement this concept in their measurements.

Happy trading in PAMM Investments !

Don’t forget to read this important article for PAMM trader

1. How to become a PAMM Trader

2. Understanding your Forex Trader Level as PAMM Trader