Economic Indicators in Forex Trading

Unlike stocks where we can evaluate its intrinsic value by looking at the company's cash flow and assets; evaluating the value of a currency involved more guesstimation job.
When someone's talking about fundamental FX trading, he or she's probably talking about analysis of macro economics. Fundamental Forex traders normally evaluate currencies using economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate.
To get you started, we shall take a look on those economy indicators that often used in Forex trading.

Retail Sales

Retails sales report is mainly used to measure the consumer's spending power in certain country. It measures the total receipts of all retail sotres in a given country.

Interest Rates

Interest rates is a primary fundamental factors that is used by most Forex traders.
The effects that might caused by a raise of interest rates are numerous. Rises in nation interest rates will definitely attracts more investors to shift their investment into the country (as the returns are higher), which in turns stregthen up the currency value. However, on the other hand, high interest rates increase the borrowing cost for the local population and thus reducing consumer buying power. Currency value falls when the consumer power reduces.
Which effect dominates can be tricky, but generally there is a consensus beforehand as to what the interest rate move will do.

The Gross Domestic Product (GDP)

GDP, defined by The World Bank, is the sum of gross value added, at purchaser prices converted at market exchange rates to current U.S. dollars, by all resident producers in the economy plus any product taxes (less subsidies) not included in the valuation of output.
It is one of the most influential economic numbers for Forex market as public normally take this figure as indicators of a country financial strength.
A very simple method to calculate GDP is:

GDP = C +I + G + NX

where

• C, equal to the total consumer expenditure
• I, equal to the total business investment in capital
• G, equal to government expenses on final goods or services
• NX, equal to the net export (Gross Export - Gross Import)

As said above, Gross Domestic Product (GDP) or GDP per capita is often refer as an overall reference on a country living standards/economy strength. While the approach has its own advantages, there are often criticisms that GDP is too simple (or nothing related) to indicate a nation financial status.
As quoted from www.wikipedia.org:

"....The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production would still have a high GDP, but a very poor standard of living...."

Unemployment Rates

The unemployment rate is the strong indicator of a nation's economic strength. The indicator is measured by dividing the number of unemployed workers to the total civilian labor force of a country. Logically speaking, the economy is weak when the unemployment rate is high.