What is Growth Domestic Product (GDP)

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GDP represents (in dollars) the total value of all of a country goods and services being produced and consumed. In order to understand the GDP number, it is important to understand the following that makes up the GDP as well as interconnecting each other.

1. Government policies
Government policies always play an important role in influencing the number of GDP such as an increase in spending by the fiscal policy will add to the upside of the GDP, or the central bank monetary policy increases the interest rate to curve inflation will also add to the downside calculation of GDP.

2. Consumer spending
Without consumer spending, there would be no economy. High consumer spending means good economy such as high employment rate, and will add to the upside of GDP. On the other hand if there is a decrease in spending that means there is uncertainty in the economy such as high unemployment rate, laid off, and low consumer confidence.

3. Investment spending
Investment spending by private or public corporations such as infrastructure, resource products, and investment revenue every year also influence the country's GDP.

4. Export and import products
Increase demands of goods overseas by consumers, normally means good economy and add to the upside of GDP.
If export number is increasing that means more products are sold oversea, given the export companies to budget or plan accordingly.

5. Inflation
Inflation adds pressure to the GDP number. Little inflation is good for the balancing of economy but too high of an inflation is bad for the economy, because it distorts and erodes the purchasing power of the dollar.

6. Interest rate
Interest rate is what you pay for borrowing. Interest rate influences the consumer spending such as low interest rate stimulating consumer spending.

Employment and the value of the dollar also are components of the GDP calculation. Adding all of the above components, you have a GDP number.


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Posted by Kyle J. Norton at 3:51 PM