Gross Domestic Product : The Basics

Investing can often be a bumpy ride, especially in the shorter term. Most of these bumps are caused by national or global macroeconomic conditions, such as GDP growth, fiscal and monetary policy. Basically, macroeconomics is related to a country’s economic welfare.    

Your financial fortune is highly dependent on how the country as a whole performs; this is especially true when you save for long and hyper long-term investment goals like retirement. 

Let’s say you have set retirement as your financial objective. Accordingly, you choose your mutual funds with care, save regularly, increase your savings each year, and resist the urge to withdraw funds throughout the investment period.

However, the country you live in defaults on its debt and is afflicted with constant geopolitical upheaval.

Given the circumstances, do you believe your savings will perform well?

Hence to make the right call, investors must evaluate the country's basic macroeconomic profile, compare it with the historical scenario and attempt to forecast the future.

Gross Domestic Product (GDP)  

Gross domestic product (GDP) measures the market value of all goods and services a country produces in a specific time frame. It’s used to gauge a nation’s economic growth and its people’s standard of living. The metric also guides investment decisions - if the GDP of particular countries is plunging, an investor may wish to rebalance his or her portfolio.

To break it down, GDP consists of the following components: 

• Personal consumption expenditures: Total amount of money citizens spend on goods and services (C)
• Government spending (G)
• Business investment (I)
• Net Exports: exports minus imports (NX)

So when you combine the pieces of GDP, you get the following formula: GDP = C + G + I + NX.

As reported by The Centre for Economics and Business Research, Bangladesh is the 34th largest economies in 2022 with a GDP size of US$460.8 billion. The country’s rapid growth has been driven mostly by high remittance flows and a thriving export sector. Even though GDP increased reasonably quickly in fiscal year 2021-22, inflation was high, owing in part to the consequences from the Ukrainian conflict.

With an average GDP growth of 6.4% during the past six years, Bangladesh has surpassed Vietnam, Indonesia, India, and Thailand to become an emerging economy. Currently, the nation is ready to become a trillion-dollar economy by 2040,

Why Does GDP Matter?

As real GDP grows rapidly, employment is expected to rise as businesses hire more workers for their factories and citizens have more money in their pockets. When GDP falls, as it happened in many nations during the recent global economic crisis, employment typically falls.

Furthermore, the growth rate of GDP significantly influences a country’s economic policy. A country may enter a recession if its GDP is too low. The Central Bank of the nation would then intervene to control the situation by enacting an expansionary monetary policy - lowering interest rates and raising the money supply. Mortgages, business loans, among others, become more accessible in such a scenario.

To curb the impacts of Covid-19, the Bangladesh Bank implemented an expansionary policy to make sure there was enough money in the financial system to help the economy recover faster. The Central Bank lowered interest rates; cut the Cash Reserve Ratio (CRR) and Repo rate; raised the advance-to-deposit ratio (ADR) and so on.

The amount of customer deposits that commercial banks are required to hold in reserve with the central bank is called the cash reserve ratio (CRR). The rate at which commercial banks borrow money by offering their securities to the central bank is known as the repo rate. The advance-to-deposit ratio (ADR) calculates the proportion of deposits to loans (advances). As a result of these efforts, Bangladesh's GDP growth rate increased to 7.10 percent in FY2022, up from 6.94 percent in FY21 and 3.45 percent in FY20.

On the other hand, the growth in GDP may result in inflation or even, hyperinflation. This is due to the fact that people will spend more money in an environment where inflation is on the rise since they are aware that it would lose value over time. This produces further GDP growth in the short run, which in turn leads to further price increases due to increased demand of products and services. In this case, the central bank adopts a contractionary policy by raising interest rates, which encourages people to save money rather than spend it.