Welcome back as I highlighted in the previous blog, having and using information is very important to be able to navigate the world of personal finances. The key to thriving investments or financial decisions is to understand that you are not an island and you live within an economic environment and whatever that happens to that environment affects you whether you understand it or not.
Today I want to set the foundation of how the economic news should be viewed, or through which lenses shall we be looking at it. We have all heard of the term Gross Domestic Product of GDP said many times. We hear people say GDP has grown or shrunk, what is this GDP? And most times the news you hear one way or another affects this animal called GDP.
Well GDP is a matric used to measure the total output of a country in a year. It is a static measure of a single period in time. It measures the production in a country and as it should follow increased production should translate to increase incomes and wellbeing.
When anyone talks of GDP there are talking about the below formula, what makes or constitutes GDP
GDP = C + G + I + NX
C = consumption or all private consumer spending within a country’s economy, including, durable goods (items with a lifespan greater than three years), non-durable goods (food & clothing), and services.
G = total government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditure.
I = sum of a country’s investments spent on capital equipment, inventories, and housing.
NX = net exports or a country’s total exports less total imports.
So the lens we will use to see how the economic, political news of the day affects you is how it affects the C,G,I and NX. Its impact on those 4 variables will tell you how the economic environment is going to be affected and ultimately what does that mean for you.
Lets take the C if something affects consumption in the economy, that means demand for goods and services will reduce. If that happens corporate profits will also reduce and the ripple effect is that jobs will be lost and incomes will suffer and the economy will not grow as fast or even stagnant. This would trigger increase government spending to try and boost economic activity, or a drop in interest rates to spur activity. What would that mean for you? Well it could mean that as interest rates drop stocks will do very well and you are better of investing in the stock market. It means as well you can refinance your loan with a cheaper one to create more disposable income. If you are a business owner it means that demand for your products might be lower hence diversification might be an option.
Join me on the next blog as we pick the main highlights of the month of January and how they will affect you.