The GDP is a global indicator of a country’s economic health. This means that a company can use it to forecast whether their industry will expand or decline. When the GDP shrinks, businesses may decide to start putting money aside as a reserve, which may result in layoffs and cost-cutting measures. If the economy is prospering, a company may decide to expand. They might, for example, hire more people, pay them better salaries, create more departments, and market more products.
What is the significance of GDP for business owners?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What impact does GDP have on business growth?
Gross domestic product (GDP) growth that is faster boosts the economy’s overall size and strengthens fiscal conditions. Growth in per capita GDP that is widely shared raises the material standard of living of the average American.
What is the relationship between GDP and business?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
What function does GDP play in the business cycle?
- The value of all final products and services produced during a given year or period is measured in real gross domestic product (real GDP), which is adjusted to exclude the impact of price variations.
- The economy goes through cycles of expansion, contraction, and expansion again. The business cycle is made up of these swings.
- The moment at which an expansion turns into a recession is known as the business cycle’s peak, while the point at which a recession turns into an expansion is known as the business cycle’s trough.
- The basic trend for most economies is to increase real GDP over time. Since 1960, real GDP in the United States has expanded at a rate of more than 3% per year on average.
What effect does GDP have on the stock market?
A country’s GDP measures both its economic growth and its residents’ purchasing power. As a result, the growth of India’s GDP will affect the success of your investment portfolio. We’ll learn what GDP is, how it’s calculated, and how a change in GDP affects your financial portfolio in this post. Let’s start with the fundamentals.
What is GDP?
A country’s GDP, or Gross Domestic Product, is the total value of products and services generated over a given time period. GDP statistics is calculated in India for each financial year, which runs from April 1 to March 31. The information is published on a quarterly and annual basis.
GDP statistics is a measure of a country’s economic health. A high rate of GDP growth suggests that the economy is growing and doing well. A negative GDP growth rate, on the other hand, implies that the economy has contracted and is not in good shape.
To address the expanding needs of the enormous population in a developing economy like India, a high GDP growth rate is essential. We can do so by investing heavily in infrastructure such as roads, railways, healthcare, and education, among other things.
How is GDP calculated in India?
The National Accounts Division (NAD), which is part of the Central Statistical Office in India, compiles and prepares GDP data (CSO). The GDP statistics is released by the CSO, which is part of the Ministry of Statistics and Program Implementation (MoSPI).
Expenditure method
The expenditure-based method shows how the Indian economy’s various sectors are performing.
- The amount spent by households on goods and services is referred to as private consumption.
- The term “gross investment” refers to the amount of money spent on capital goods by the private sector.
- Government spending refers to how much money the government spends on things like paying employees’ salaries, pensions, subsidies, and running social programs, among other things.
Value Addition Method
India also uses the Gross Value Addition (GVA) Method or Value Addition Method to calculate GDP. As it goes through the supply chain, each sector of the economy adds value. The GVA approach calculates GDP by taking into consideration the following eight sectors:
The nominal GDP is calculated first when computing GDP. After that, it’s corrected for inflation, and the real GDP is calculated.
India’s GDP in the last few quarters
India’s quarterly GDP data for the last three years is depicted in the figure above. Positive increase was seen in the first quarter of 2020. Following that, COVID-19 struck, resulting in two quarters of negative growth. The Indian economy recovered from the pandemic’s effects in the fourth quarter of 2020, growing at a rate of 1.6 percent.
India’s GDP growth over the last decade
From 2012 to 2016, India’s GDP grew at a faster rate every year, as shown in the graph above. However, beginning in 2017, growth began to decline until 2019. COVID-19’s impact at the start of 2020 exacerbated the situation.
How a change in GDP affects your investment portfolio
Stock markets are directly associated with a country’s GDP, according to the general rule. India is no different. Because markets and GDP are intimately interrelated, your investment portfolio is also directly correlated with GDP.
- The stock markets will be energized by a positive shift in the GDP (a higher GDP growth number), and the market will rise as a result. If the stock market rises, it will have a beneficial impact on your investment portfolio.
- A negative change in the GDP (a lower GDP growth statistic or a GDP contraction) will undoubtedly cause the financial markets to react negatively. As a result, the stock market will fall. If the stock market falls, it will have a negative influence on your investment portfolio.
There is a positive association between India’s GDP growth and the NIFTY 50 Index, as shown in the graph above:
- India’s GDP expanded at an annual pace of roughly 8% from 2004 to 2008. During this time, the NIFTY 50 Index climbed from 2000 to 4000 points. During this time, your investment portfolio should have done well.
- The subprime mortgage crisis hit the United States in 2008-2009, with global ramifications. During this time, India’s GDP growth slowed from 8% to roughly 3%, and the NIFTY 50 Index dropped from highs of 4000 to lows of 3000. During this time, it would have had a detrimental influence on your financial portfolio.
- Between 2009 and 2011, the GDP recovered, and the NIFTY 50 Index did as well. Your financial portfolio would have rebounded as well.
- GDP growth slowed between 2011 and 2013, owing to reasons such as high crude oil prices, high inflation, and the European debt crisis, among others. During this time, the NIFTY 50 Index also saw a correction. Your investment portfolio would have suffered as well.
- The GDP increased significantly from 2013 to 2018, surpassing 8% for the second time. During this time, the NIFTY 50 Index performed admirably. During this time, your investment portfolio would have produced impressive gains.
- In recent years, the direct association between GDP growth and the NIFTY 50 Index appears to have weakened. In truth, there is a significant gap between the two. So, despite the fact that GDP growth has slowed, your investment portfolio has produced excellent results.
Divergence between GDP growth and stock markets
The relationship between GDP growth and stock markets is usually direct, as shown in the graph above, but this is not always the case. The Nifty 50 Index and GDP growth headed in different directions in 2019, and this trend persisted in 2020 and 2021. The following things may contribute to such a scenario:
Stock markets that are always looking ahead: Stock markets are always looking ahead. So, even if GDP growth is currently modest, the stock markets are anticipating strong GDP growth in the future and are trading at higher levels as a result.
High liquidity: In the previous year and a half, central banks and governments around the world, including India, have implemented various stimulus initiatives to mitigate the impact of COVID-19. People have received cash as a result of this. The majority of this money has been placed in the stock markets, which has resulted in greater stock market trading levels.
Other than stock, there aren’t many investing options: To counteract the pandemic’s effects and jump-start the economy, the RBI slashed interest rates dramatically. As a result, banks’ fixed deposit rates have dropped to multi-year lows. When the pandemic hit, gold spiked, but it has since adjusted and remained static. As a result, except from stock, Indian individual investors have few other investing options. As a result, most investors have put their money into stocks, causing the NIFTY 50 Index to rise.
Foreign fund flows: In the recent year, foreign institutional investors (FIIs) have invested massive sums of money in Indian stock markets, in addition to Indian ordinary investors. The NIFTY 50 Index has also risen as a result of this.
Better company profitability: The pandemic has impacted the whole Indian corporate sector. The unlisted economy, SMEs, MSMEs, and the informal economy continue to suffer. Large publicly traded corporations, on the other hand, have been able to weather the storm much more quickly and effectively. As a result, huge publicly traded firms’ profits have increased, and their stock values have increased, causing the NIFTY 50 Index to rise.
Divergence between GDP growth and stock markets is temporary
We’ve seen how the GDP growth rate and stock market performance can diverge. This type of divergence, however, is just transitory and will be corrected at some point. Either the GDP growth rate will rebound and the Indian economy will return to its previous high growth rate, or the stock market will correct in tandem with the low GDP growth rate in the future.
India’s GDP growth rate has a better chance of increasing than the stock market falling. Still, only time will tell what will transpire. What appears likely is that, over time, the pace of GDP growth and the stock market will re-establish a direct relationship.
Last words
You would be getting strong returns on your investment portfolio right now, even if GDP growth is sluggish. However, this may not last long, therefore let’s hope India’s GDP growth picks up rapidly so that our current investment returns remain stable and grow in the future. In the long run, proper asset allocation will ensure that your investment portfolio earns the best possible returns, even if GDP growth is sluggish. When the equity markets are performing poorly, the debt and gold sections of your investing portfolio can provide good returns. As a result, ensure that you have a suitable asset allocation between equity, gold, debt, and other assets, so that you can continue to achieve optimal returns regardless of GDP growth.
What are some of the benefits of GDP?
- GDP allows policymakers and central banks to determine whether the economy is contracting or increasing and take appropriate action as soon as possible.
- It also enables policymakers, economists, and businesses to assess the influence of factors such as monetary and fiscal policy, economic shocks, and tax and expenditure plans.
- The expenditure, income, or value-added approaches can all be used to determine GDP.
Is a higher or lower GDP preferable?
Gross domestic product (GDP) has traditionally been used by economists to gauge economic success. If GDP is increasing, the economy is doing well and the country is progressing. On the other side, if GDP declines, the economy may be in jeopardy, and the country may be losing ground.
Y = C + I + G + X + Z
- Net Income (Z) (Net income inflow from abroad minus net income outflow to foreign countries)
The production of physical commodities such as automobiles, agricultural products, machinery, and other machinery, as well as the provision of services such as healthcare, business consulting, and education, are all included in the Gross National Product. Taxes and depreciation are included in GNP. Because the cost of services utilized in the production of items is included in the cost of finished goods, it is not computed separately.
To produce real GNP, Gross National Product must be adjusted for inflation for year-to-year comparisons. GNP is also expressed per capita for country-to-country comparisons. There are challenges in accounting for dual citizenship when computing GNP. If a producer or manufacturer is a dual citizen of two nations, his productive output will be considered by both countries, resulting in double counting.
Importance of GNP
The Gross National Product (GNP) is one of the most important economic statistics used by policymakers. GNP provides vital data on manufacturing, savings, investments, employment, significant company production outputs, and other economic indicators. This data is used by policymakers to create policy papers that legislators use to pass laws. GNP data is used by economists to solve national issues such as inflation and poverty.
GNP becomes a more trustworthy statistic than GDP when assessing the amount of income earned by a country’s citizens independent of their location. Individuals in the globalized economy have various options for earning money, both domestically and internationally. GNP gives information that other productivity measurements do not incorporate when measuring such wide data. GNP would be equal to GDP if people of a country were limited to domestic sources of income, and it would be less valuable to the government and policymakers.
GNP information is also useful for examining the balance of payments. The difference between a country’s exports to foreign countries and the value of the items and services imported determines the balance of payments. When a country has a balance of payments deficit, it indicates it imports more goods and services than it exports. A surplus in the balance of payments indicates that the value of the country’s exports exceeds the value of its imports.
GNP vs. GDP
The market value of items and services produced in the economy is measured by both the Gross National Product (GNP) and the Gross Domestic Product (GDP). GDP reflects domestic levels of production, whereas GNP measures the level of output of a country’s population regardless of their location. The distinction arises from the fact that there may be many domestic enterprises that manufacture things for export, as well as foreign-owned companies that manufacture goods within the country.
GNP exceeds GDP when the income earned by domestic enterprises in foreign nations exceeds the income earned by foreign firms within the country. Because of the large number of manufacturing activities carried out by American people in other nations, the United States’ GNP is $250 billion more than its GDP.
The most common method for measuring economic activity in a country is to use GDP. Until 1991, the United States utilized Gross National Product as its primary indicator of economic activity. The Bureau of Economic Analysis (BEA) recognized that GDP was a more convenient economic indicator of total economic activity in the United States while making the changes.
The Gross National Product (GNP) is a valuable economic measure, particularly for determining a country’s income from international commerce. When appraising a country’s economic net worth, both economic indicators should be included in order to obtain an accurate picture of the economy.
Gross National Income (GNI)
Large institutions such as the European Union (EU), the World Bank, and the Human Development Index employ Gross National Income (GNI) instead of Gross National Product (HDI). GDP + net revenue from abroad, plus net taxes and subsidies receivable from abroad, is the definition.
The Gross National Income (GNI) is a metric that evaluates how much money a country’s inhabitants make from domestic and international trade. Despite the fact that GNI and GNP serve the same goal, GNI is thought to be a better measure of income than production.
What is the significance of GDP per capita?
Gross Domestic Product (GDP) per capita is the abbreviation for Gross Domestic Product (GDP) per capita (per person). It is calculated by simply dividing total GDP (see definition of GDP) by the population. In international markets, per capita GDP is usually stated in local current currency, local constant currency, or a standard unit of currency, such as the US dollar (USD).
GDP per capita is a key metric of economic success and a helpful unit for comparing average living standards and economic well-being across countries. However, GDP per capita is not a measure of personal income, and it has certain well-known flaws when used for cross-country comparisons. GDP per capita, in particular, does not account for a country’s income distribution. Furthermore, cross-country comparisons based on the US dollar might be skewed by exchange rate movements and don’t always reflect the purchasing power of the countries under consideration.
For the last five years, the table below illustrates GDP per capita in current US dollars (USD) by country.
Are you looking for a forecast? The FocusEconomics Consensus Forecasts for each country cover over 30 macroeconomic indicators over a 5-year projection period, as well as quarterly forecasts for the most important economic variables. Find out more.
What influences the GDP?
Natural resources, capital goods, human resources, and technology are the four supply variables that have a direct impact on the value of goods and services delivered. Economic growth, as measured by GDP, refers to an increase in the rate of growth of GDP, but what affects the rate of growth of each component is quite different.