How is GDP of a Country Related to its Economy?May 1, 2018
Gross domestic product or GDP is the main indicator to measure the economy of a country. It is equal to the total value of all the goods and services produced in the country in a year and it is measured in terms of dollars. GDP growth is an important measure of the direction in which the economy of the country is going. There are many ways in which it affects the economy of a nation.
Here are the different ways in which a country’s economy is related to GDP.
The value of a country’s currency depends on its GDP. For example, if the GDP of US grows over the past year, it will appreciate the US dollar. It will require more foreign currency to buy the US dollar. Thus, the GDP growth of a country is directly proportional to its currency’s value in most of the cases.
2. Impact on Interest Rates
The GDP of a country also affects its prevalent interest rates. When the GPD grows, it is a sign that people are spending more to buy goods and services. The central bank will have to increase the prime interest rate to prevent inflation. This reduces the liquidity of cash in the market. When the GPD slows down, the central bank will lower the interest rate to allow the consumers to take loans and purchase more goods.
3. Government Budgets & Policies
The GDP of a country has a major impact on its government’s budget and economic policies. If the GDP doesn’t grow, the government is highly likely to change its economic policy to trigger growth. If the GPD grows, the government is going to propose even new policies to further promote growth and prevent inflation.
GDP also affects the plans of large organizations in a country. For example, if the GDP grows, more companies are likely to hire new employees. Thus, gross domestic product plays a very important role in the economy of a country.