What is GDP really, and how does it affect our investments?

Have you ever wondered why every time GDP data is announced, the stock market fluctuates wildly? Because GDP is an indicator that tells us whether a country is growing or shrinking, and this directly impacts the income of companies in the capital markets. This article will trace the GDP to help you understand what it is, how it is calculated, and why investors should pay attention.

Why is GDP important to the stock market?

First, you need to know that GDP is the total value of goods and services produced within a country over a certain period. This figure is important because it shows whether our economy is expanding or contracting.

Companies listed on the stock exchange depend heavily on economic conditions. When GDP rises, consumers have more money to spend, entrepreneurs invest more, leading to higher profits for companies, and stock indices go up. Conversely, a declining GDP indicates an economic slowdown, and company revenues decrease.

What does GDP consist of?

The basic formula for GDP is GDP = C + G + I + NX, comprising four main components:

1. C - Private Consumption (Private consumption)

This is the expenditure of consumers. When people are confident about the future, they buy more goods and services. This component usually makes up the largest share of GDP. If consumer confidence drops, they become cautious with spending, leading to a decrease in GDP.

2. G - Government Spending (Government expenditure)

The government spends on infrastructure, hiring workers, purchasing equipment. During economic downturns, the government increases spending to stimulate the economy.

3. I - Investment (Investment)

This refers to business investments in new projects, machinery. Increased investment indicates plans for growth, positively impacting GDP.

4. NX - Net Exports (Net exports)

Calculated as exports minus imports. If exports exceed imports, NX is positive, helping to boost GDP.

There are two types of GDP you should know

Nominal GDP - Current prices

This is GDP measured at current market prices, not adjusted for inflation. It shows the percentage increase but doesn’t tell us whether growth is due to actual increased production or just higher prices.

Real GDP - Adjusted for inflation

This is GDP adjusted to reflect true growth, removing the effects of inflation. It allows us to compare economic performance across different years accurately.

For example, if Nominal GDP increases by 10% but inflation is 8%, then Real GDP has only increased by about 2%.

How to calculate GDP internationally: 3 methods

In theory, GDP can be calculated in three ways:

Method 1 - Expenditure Approach (Expenditure)

Using C+G+I+NX as mentioned above, viewed from the perspective of the buyer.

Method 2 - Income Approach (Income)

From the income generated perspective, summing wages, profits, and other income. The total should match the expenditure approach.

Method 3 - Production Approach (Production)

From the perspective of goods and services produced, summing the value added at each stage of production, from raw materials to finished goods.

What does a decline in GDP mean?

When GDP declines, it indicates that Real GDP is contracting, which could be a sign of a recession (Recession). If it declines for two consecutive quarters, it can lead to:

• Unemployment and job losses
• Reduced company revenues
• Possible decline in prices of goods and real estate
• Stock market may also decline

For example, in the US, when GDP drops, the SET Index in Thailand tends to be worried and often declines.

What does an increase in GDP mean?

An increase in GDP generally indicates:

• Economic expansion
• Stable employment and higher income for consumers
• New investments by entrepreneurs
• Companies raising wages and profits
• Stock markets gaining support from positive news

However, excessively high GDP may signal high inflation, which can be problematic.

Concerns about inflation and GDP

This is a key point investors must understand: Nominal GDP may increase while Real GDP remains flat or declines due to high inflation.

For example, if Nominal GDP rises by 7% but inflation is 8%, then Real GDP actually decreases by 1%. This is called “wealth illusion” — prices go up, but people’s real purchasing power decreases.

GDP and its relationship with the capital markets

Let’s analyze further: listed companies in the stock market are the creators of GDP. Therefore,

• GDP ↑ = Company performance ↑ = Stocks ↑
• GDP ↓ = Company performance ↓ = Stocks ↓

This is why stock markets tend to move in the same direction as GDP most of the time.

Summary: Why is GDP important?

GDP is an indicator of a country’s economic health. Investors need to monitor this data because:

1. It tells us whether the economy is expanding or contracting
2. It directly affects company revenues
3. It helps forecast stock market movements
4. It aids in long-term investment planning

However, GDP is not the only indicator. Investors should also consider other data such as inflation rate, unemployment rate, consumer confidence, to get a comprehensive economic picture and make more accurate investment decisions.