Forex market investors utilize two main types of analysis to place their trades – technical analysis and fundamental analysis. Technical analysis looks at currency rate fluctuations during a given time (via charts), while fundamental analysis utilizes a variety of economic indicators (i.e. Gross Domestic Product, interest rates, retail sales, and the Consumer Price Index (CPI)). Each indicator is important in helping to make that trade decision, but the Gross Domestic Product (GDP) is one of the stronger economic indicators. If a country’s GDP is rises, chances are the exchange rate will increase; if the GDP falls, then a country’s exchange rate might drop.Defining the Gross Domestic Product

The Gross Domestic Product (GDP) is the total amount of good and services produced within a nation’s border. Prior to the early 1990’s, the main tool to assess the total amount of movement of goods and services for the United States was through the Gross National Product (GNP). Since the early 1990’s, however, the GDP has been the tool of choice since other countries use that same standard. The difference between the two figures is that the GNP also includes goods and services produced outside the United States. If a product will be produced in South America, for example, the profits arising from that product would be included in the GNP (but not in the GDP).

Calculating the GDP

Three main approaches exist for calculating the GDP – the expenditure approach, the income approach, and the product approach. Each approach leads to the same figure but through a different calculation. The expenditure approach, which assesses the total amount of expenditures, is calculated using four main components: personal consumption (durable and non-durable goods and services); investments (fixed assets and inventories); government purchases (schools, roads, etc.); and net exports (exports minus imports).

Here’s how the formula actually appears:

GDP = Consumption (C) + Investments (I) + Government purchases (G) + Net exports (NE).

Releasing of data

The Department of Commerce releases GDP reports on a quarterly basis. These reports are considered lagging indictors (as opposed to leading indicators), since the data is a summary of past events. Even so, the GDP numbers are important in predicting trends in a country’s economy, which can affect a country’s exchange rate.

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