Did you know that the Gross Domestic Product reflects whether a country’s economy is growing or stagnating?
Understanding the total sum of production of goods, services, and investments is the key to see the big picture of the economy. The production of food, vehicles, technology articles, transportation services, medical services, and many others are included in GDP.
The total of the goods and services that can be counted measures the size of the economy. The higher the GDP of a country, the greater capacity to generate employment and attract new investment.
Although GDP has certain limitations, it remains one of the most important economic indicators for investors who want to put their money in countries that promise growth. Unfortunately, the calculation is inaccurate because it does not include activities such as the informal economy and domestic work such as caring for children and the elderly.
This article will guide you and help you understand why GDP is so important and what happens when it increases or decreases. We will also mention some countries with the highest GDP in the world today if you consider investing in any of them.
Why is GDP important?
If there is one economic indicator that economists tend to look at, it is GDP. The calculation is crucial because if economic activity picks up, the unemployment rate tends to fall, and per capita income rises. That is why investors and governments consider this indicator to establish business relationships.
What happens if GDP increases or decreases?
When a country’s GDP increases, it is a good sign for the economy and affects virtually everyone in the territory. On the contrary, when it falls, it is a bad sign. We could liken it to a family or a company; it is generally favorable if income increases. On the other hand, if income decreases, it is negative.
When GDP rises, consumption, spending, and investment are generally increasing along with exports and imports in the territory. Therefore, it positively affects the economy, increasing the income of companies, families, and the state, which will have more capital to invest and create jobs.
On the other hand, when GDP decreases, or there is an economic recession, consumption and company profits decrease in aggregate, thus reducing employment and investment.
How GDP affects investments
Investors look at the growth rate of countries to decide if they should adjust their asset allocation. They also compare the growth rates of countries to find international investment opportunities to buy shares of companies in fast-growing countries.
If there is a lack of foreign investment in a country with a low GDP, that country is unlikely to grow. One of the most striking cases is that of Venezuela, which was one of the wealthiest nations in Latin America and the world. Still, in the year 2020, Venezuela had the highest inflation in the world. So, who would invest in a country with such a shattered economy?
Which are the countries with the highest GDP in the world and why?
According to the International Monetary Fund, the ten countries with the highest Gross Domestic Product in 2020 are:
- United States
- United Kingdom
- South Korea
Countries with high GDP per capita have reliable institutions, high literacy rates, low infant mortality rates, and longer life expectancy.
Successful economies provide their citizens with a better quality of life and thus more significant development.
Which are the countries with the lowest GDP and why?
According to the International Monetary Fund, the ten countries with the lowest gross domestic product in 2020 are:
- Burkina Faso
- The Gambia
- Sierra Leona
- Sudán del Sur
Most countries with the lowest GDP are in Africa. The poverty in these countries is usually due to constant conflicts. These problems hardly appear in Western media, thus remaining unknown to the rest of the world.
Also, resources are being depleted. The population is running out of food, housing, and, of course, the necessities that seem essential in rich countries.
In addition, forced migrations due to conflicts and increasingly due to the consequences of climate change are becoming more and more frequent. And this only increases the poverty figures.
Investing in emerging economies
One has to keep in mind that emerging economies meet the demand for goods from developed markets. Moreover, the weakness of the dollar and the rise in commodities favor these economies.
China has already overtaken the United States as the largest economy in GDP.
India could overtake the United States by 2050 to take second place, and Indonesia could advance to fourth place, which would relegate advanced economies such as those of Japan and Germany.
Therefore, stocks based in emerging economies should be considered for long-term investments. One example is the company that manufactures electric vehicles called NIO. As a result, the price of the share increased more than 1000% in 2020.
Also, if you are a Forex trader, comparing the GDP of some of the countries’ currencies in conjunction with other indicators can help you in your decisions.
The International Monetary Fund estimates that by 2022, emerging economies will grow more than developed economies.
There is no doubt that taking into account the Gross Domestic Product of a country before making any investment is a wise decision.
For example, suppose we decide to invest in a company that has operations in developed countries or emerging economies. In that case, you will probably get a good return on investment.
On the other hand, if you invest in countries where companies are withdrawing their headquarters, such as Argentina or Venezuela, you will probably get losses.