Gross domestic product (GDP) is one of the most commonly used economic terms you are likely to come across. It is frequently referenced in news articles, on the TV and in reports released by governments, financial institutions and in the business community.
GDP has become an important reference point for how we talk about, measure and assess the health of both domestic and global economies. When GDP growth stalls or is negative, it is often used as justification by both public and private organizations to take drastic actions in how they manage their operations.
For this reason, if you are an individual taking part in your local economy, GDP matters a lot!
Despite the frequency of GDP in the daily news cycle, however, there is often a lot of confusion about what is GDP and how it is calculated. There is also a general lack of understanding about why GDP matters to you or your business.
With this in mind, in this short article, we will give you a brief introduction to what GDP is and identify some of the ways understanding this core economic concept can help you in running or even starting a business.
What Is GDP?
In short, GDP is a way of measuring the total economic output of an economy within a defined period of time. It typically measures the total monetary value of goods and services produced within a specific geographic region, such as a country, continent or region, and is calculated on a quarterly or annual basis.
But does GDP actually matter for businesses?
GDP is useful, its advocates argue, because it is a comprehensive metric that allows us to quickly gauge the health of an economy.
There are various ways of expressing GDP, with the most popular being: nominal GDP, real GDP, GDP per capita, GDP growth rate and GDP purchasing power parity. Each of these captures a slightly different way of viewing the performance of an economy, depending on what kind of understanding you are hoping to provide.
In terms of how GDP is calculated, although this is a very contentious topic between economists, there are three main methods: the expenditure approach, the output or production approach and the income approach.
With this basic understanding in mind, let’s now move on to considering some of the different ways that an understanding of GDP can help you in running or starting a business.
How Can It Help Your Business?
Most nations will release GDP data on a monthly, quarterly and annual basis, each of which serves a slightly different function depending on how it is measured. GDP releases are usually very comprehensive and are filled with incredible amounts of detail about the economy.
This information can be useful for investors looking to develop an investment strategy for the year ahead, as well as heads of businesses trying to forecast the sort of economic conditions that lie ahead. This information is backward looking, so it can arguably be quite limited. Nevertheless, it provides an incredibly useful source of information for anyone participating in the economy.
If the GDP growth rate seems to suggest that the economy is slowing, this might indicate that the government will develop a more expansionary monetary policy to try and boost the economy. On the other hand, if the growth rate is too positive, this might signal that the new monetary policy will try to cool things down to reduce the likelihood of inflation occurring.
This information can provide you with a framework in which to make investment decisions. This is equally true for hedge fund and private equity professionals, as it is for someone designing a business plan for their new business.
Making use of GDP data from other countries might provide you with insight into where you should consider investing next or what countries to consider using for production.
Similarly, given that GDP data will also be used by governments to make monetary policy decisions, you can use this information to see how the economic environment in your country might change in the near future. This would be relevant if you are thinking about taking out a loan to start or expand your business operations.
Policy changes in relation to GDP are also relevant to the extent that it might signal a broader reduction in public spending, which will inevitably impact your business venture.
Final Thoughts On GDP And Business
With all of this in mind, we can see how understanding GDP is essential to understanding the wider economic context in which you are launching or managing your business. Although the data can be quite complex, you can still use gross domestic product as a way of forecasting what the health of the economy might look like in the near future.
