One of the best ways to judge a country’s economy is by looking at the Gross Domestic Product (GDP). The GDP is the total value of everything produced in a country’s economy whether it is consumed within its borders or abroad.
The GDP metric is most often used to evaluate the growth of the economy. Consequently, it is compared to the previous quarter or the same quarter from previous years and measure as a percent of change. GDP is also used to compare economies in different countries to each other and identify which countries have growing economies.
The GDP may seem like an abstract concept, but it has realistic implications for average consumers. For one, individual investors can use GDP trends to influence where they allocate investment assets. For example, if an emerging foreign economy shows rapid GDP growth, investors may want to investigate investment opportunities in that country.
The Bureau of Economic Analysis (BEA) issues reports on Gross Domestic Product, and different sectors of the economy are evaluated. Looking at trends within economic sectors can also help investors decide where to put their money. For example, if GDP growth for manufacturing sectors is declining, you might want to shift your investments away from manufacturing companies.The Federal Reserve uses GDP growth, among other things, as a metric to determine when to raise and lower interest rates. If the rate of GDP growth increases, the Fed might decide to raise interest rates to prevent inflation. When the Fed raises interest rates, rates on consumer loans like mortgages also increase. Consequently, consumers can track the GDP as a way of predicting when to lock in a rate on a loan. If you expect the Fed to raise interest rates, it would be wise to lock in a fixed lower interest rate on a mortgage, for example.