Investments provide an excellent opportunity for you to increase your wealth. There are many investments you can choose from; property, oil, gas, stocks, technology, agriculture etc. What matters is not the investment but rather the returns.
A good choice for investment plus a country’s economic stability can give you significant returns. Economic growth is mainly determined by Gross Domestic Product (GDP) of a nation. The total cost of all the produced goods and services within a region is what is referred to as GDP.
Ways of calculating GDP
Below are the three different methods. It can get a little confusing, but Wiki How shared an excellent tutorial on the various calculations.
Expenditure approach – it is the total of all the spending in a specific period within an economy. This is the most common approach used by countries.
Income approach – it is calculated by adding up all the total income that individuals and companies earned within a particular period.
Value-added approach – it is calculated based on specific industries.
How GDP can affect individual’s investment
When GDP is growing steadily that means the economy of the country is growing. Private investors and governments will be ready to invest in the country. Investment leads to the creation of jobs and better salaries and wages for employees, as discussed in this Moneyfarm blog.
Purchasing power of citizens
When employees are paid well, they will have more money to spend. They can then afford to buy basic needs and luxurious items. So if you are in production of goods and services, people have money to buy your products. They can afford to buy because they are paid well. Your company will have a shot at growing and even expanding.
However, if they are paid poorly or laid off because the economy is not doing well, that means fewer customers for your goods or services.
When there is a growth in GDP, more investors may take loans to finance a business. Hence banks will charge higher interest rates due to the demand for loans. What happens when the economy starts experiencing slow growth, and you are still repaying your business loan?
Well, it will have an effect on your Return on Investment (ROI). You will still be expected to pay back the loan even when business is bad.
Seeking funding from banks for expansion
It goes without saying that taking a loan when the economy is experiencing slow growth may not be the best idea if you don’t anticipate growth in the near future. Slow growth in GDP means that people are not spending money so they may hold back on buying your goods and services. With a loan, you are likely to experience losses rather than gains.
Competition in an industry
During a steady GDP growth, there is an opportunity for investors to invest in different businesses. As such, there is a greater possibility of stiff competition during economic growth. Competition will be a good thing because you have customers but bad because stiff competition can as well take you out of business.
Competition is advantageous to consumers as they have more products and services to choose from. But for businesses, they have to be better and build customer loyalty to survive.
Although most analysts use GDP to calculate a country’s economic growth, it cannot be deemed precisely as the only guide of economic prosperity. A region may be experiencing growth in GDP, but the income disparity between the poor and the rich is still high.
The best way to make better investment decisions is by being informed on current events in different economies in the world.