Stock market Essay Example | Topics and Well Written Essays - 2500 words

Stock market - Essay Example Gross Domestic Product is the total market value of all the final goods and services produced within a nation's borders in a given time period. Each goods and services produced and brought in the market have a price. The price of the total output is called as GDP. It can be measured by either cumulating all the income earned in the economy or all the spending in the economy and both measures should roughly equate to the same total. GDP is the basic measure of an economy's size. With the GDP used as a key indicator of economic activity and future economic prospects, any significant change in the GDP, either up or down, can have a major effect on stock market investors' sentiment. If investors believe that the economy is improving, and corporate earnings improving along with it, then they are more likely to bid stock prices to higher levels. Conversely, an actual or expected decline in GDP is very likely to run in parallel or in advance to a declining stock market. There is an alternat ive view to the interplay between GDP and the stock market. The stock market itself may exert a reverse effect on subsequent economic activity: a fall in the market may erode personal wealth, real or perceived, such that individuals will stop spending. With consumer spending representing around two-thirds of GDP, even a small change in consumption can exert significant negative effects on GDP. This is referred to as the "wealth effect", where if investors feel poorer, they will stop spending, thereby decreasing GDP and further exacerbating an already declining market. The Housing Market: The housing market is one of 10 leading economic indicators and a good measurement of discretionary spending by the general public making up 5% of the value of the overall economy. When the economy is up, people have a tendency to spend more and housing permits and sales are good indicators of this trend. When the economy slows people spend and building and buying will have a tendency to decline. The concern in the current housing market is with the recent surge in defaults with sub-prime loans. This trend is a major factor in the current decline of the housing market which can act as a deterrent to growth and can cause a ripple effect in the rest of the economy.