3
$\begingroup$

According to definition of GDP as total expenditure, GDP includes goods and services currently produced. So it does not include transactions involving items produced in the past. For example buying a new car increases GDP. But buying a used car does not.

My question is: does this rule apply to stock market. Is this statement true for example: when a company goes IPO, issued stock certifications (when sold) increases GDP. But when we buy stocks from another seller in stock markets they does not. Also what happens to GDP when the price of a particular stock increase or decrease?

$\endgroup$

1 Answer 1

4
$\begingroup$

Are stocks prices included in GDP?

No, they aren't. Buying stock is a transfer of asset not a purchase in a sense understood by macroeconomists.

My question is: does this rule apply to stock market. Is this statement true for example: when a company goes IPO, issued stock certifications (when sold) increases GDP. But when we buy stocks from another seller in stock markets they does not. Also what happens to GDP when the price of a particular stock increase or decrease?

The rule that only final expenditure on goods and services counts applies to all market exchanges. However, as explained in the first part sale of stock is not sale of goods or services. Stocks are neither final good or service, they are transfers of wealth from investor to company.

IPOs do not increase GDP directly. GDP will increase once the company spends the money on investment (but note in economics buying stock is not considered investing - spending on capital goods or accumulating inventory is investing from macro perspective) or once it produces some goods or services with that money which are then bought by final consumers. Otherwise GDP is not affected.

Hence stock prices do not directly increase or decrease GDP. They can affect GDP in a sense that level of investment in an economy depends on return people get on saving. Return on saving in form of stock depends in turn on change in the stock prices over time. Of course, there is some nuance to it but I won't explore it here as it is only tangentially related to question about calculation of GDP. But the point is that stock prices do not directly factor into calculation of GDP.

$\endgroup$
4
  • $\begingroup$ "GDP will increase once the company spends the money on investment" sure but ... common use of the term investment includes the practice of buying stocks and a lot of companies holds large stock portfolios. So this does not really answer the question at hand. Also, the return is large price appreciation/depreciation which makes 'They can affect GDP in a sense that level of investment in an economy depends on return people get on saving.' a rather incomplete answer. $\endgroup$ Mar 11 at 14:16
  • 1
    $\begingroup$ @JesperHybel but in macroeconomics investment does not mean buying stocks. Also, I think the relationship between stock returns and interest rates is a tangential topic since OP asked about calculation of GDP, I agree it’s incomplete $\endgroup$
    – 1muflon1
    Mar 11 at 14:18
  • $\begingroup$ @JesperHybel btw I clarified the part about investment and mentioned that the relationship between investment and GDP is longer story $\endgroup$
    – 1muflon1
    Mar 11 at 17:34
  • $\begingroup$ Yes, more understandable now in my opinion. $\endgroup$ Mar 12 at 8:15

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.