When you're planning investment strategies in the U.S. or a foreign country, it's a good idea to look at some broad economic indicators, along with the specifics of a particular company you're interested in. One indicator of a country's overall economic growth, decline or health is its Gross Domestic Product.
That number by itself can be helpful in making projections, but calculated per capita, it can help you look at how the average person lives. Understanding how to calculate GDP per capita by country will give you one more piece of information to help make your decisions.
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What is GDP?
Gross Domestic Product refers to the total amount of goods and services purchased in a country for a specific time period, explains the International Monetary Fund. Economists look at GDP spending in three areas: by the government, by business and by consumers.
Read More: How Does a Recession Affect Consumers?
Harbinger of Recession
The common definition of a recession is two consecutive quarters of negative GDP growth. If you define a recession as any severe downturn in a country's economic activity that will last for months or more, a country might be in a recession during any given quarter –meaning the recession has started. However, until the following quarter's numbers come in and show the two consecutive quarterly losses, economists usually won't officially say the country is in a recession.
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It’s One Piece of the Puzzle
Trying to guess when a recession is coming and how it might affect your investments is a very difficult thing to get right. In addition to watching GDP numbers each quarter, you should also look at other broad economic trends, such as housing starts, monthly unemployment and wage numbers, bankruptcies, interest rates and consumer prices.
If all or most of these are headed in the wrong direction, you should call your financial advisor sooner than later to set some benchmarks for when you should start moving your assets.
Calculating GDP Per Capita
GDP per capita means GDP per person. This can be a helpful number if you are considering investing in a business in a foreign country, or in a company that is expanding into a specific country. If GDP per person is low, that means the average person has less income and wealth and less to spend. If GDP per person is high, that country might be a good market for a business, especially one that sells discretionary products.
To calculate GDP per capita, simply divide the country's gross domestic product by the number of people. You can make multiple calculations for a year by doing the calculation for each quarter. This will help you spot recent trends. Or, you can make year-to-year comparisons.
You can do a Google search to find a GDP per capita calculator, or do the math yourself. To make the calculation yourself, take the end-of-year GDP and divide it by the mid-year population of the country (because people are born and die throughout the year). In the U.S., that number came to $63, 416 in 2020, or a 2.82 percent decline from the previous year. You can visit the U.S. Census Bureau for U.S. population numbers.
You can easily find the U.S. GDP per capita just by asking that question in Google, but if you are searching for another country's number, you might need to do the math yourself. If you find a country with a population of 8 million people and a GDP of $40 billion, for example, the GDP per capita of that country is $5,000.