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How Does GDP Affect the Economy?

The GDP or the Gross Domestic Product is a gauge of an economy’s health. To put it simply, it is the representation of the total value of a country’s goods and services over a specified time period.

There are two ways to compute for the GDP: the income approach or the expenditure method. In the income approach, economists add up the total approximate amount of income that a country’s working force has earned. This includes the wages of the working force, the gross profits of companies, and the taxes minus the subsidies. In the expenditure method, as the name implies, is when economists total the approximate amount of expenses that a country has done. This includes the governments expenses, the net exports, and the total consumption of the country. Of course, there are still a lot of factors to take into consideration such as inflation and market events but either way, economists should arrive at roughly the same amount for the GDP.

The GDP data is typically presented as the percentage of gain or loss from the previous year or quarter or other time period. Because of this, the GDP may be thought of as the size of a given economy that may grow or shrink. For example, an economy’s GDP is up by 2%, it means that the economy has expanded and if declined by 2% it means the economy has shrunk.

The GDP affects a lot of aspects in the economy such as businesses, currencies, government policies, and interest rates. The GDP affects business decisions whether they will expand or contract depending on the well being of the economy and the people in it. The currency of a country is affected by GDP as it dictates whether the value of a currency will appreciate or depreciate depending on the approximate value of an economy. Government policies adapt to the needs of the economy as indicated by the GDP. The government adjusts to either help the economy by easing policies or boost the economy even more by implementing policies. The GDP greatly affects the interest rates for loans as it signifies the next move of central banks whether to hike or pare interest rates to prevent inflation.

As the GDP is computed using factors that make up the economy, it also affects the economy significantly. Being the representation of an economy’s health, the GDP can dictate the next movement of the economy. If the GDP increases, this means there is high employment and increase in earnings as a growing economy means more jobs and more businesses. This may attract foreign investors thus promoting more growth. The stocks of this country becomes more appealing. Meanwhile, if the GDP decreases, this might mean that companies have lower profits and thus cheaper stock prices making foreign investors cautious. This might also spell the beginnings of recession. Either way, the GDP is one of the most important data in the market that dictates the next movement of a country to remedy or continue nurturing their respective economies.

Created by : Anthony
Published : 17 Aug 2015

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