Reasons for a Decrease in Real GDP

  Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
  Written by: Andra Picincu      Updated November 21, 2018
GDP decline

The success of your business depends mainly on the real GDP (gross domestic product). At the most basic level, it is a monetary measure that represents economic production and growth. When a country's real GDP is stable or increasing, companies can afford to hire more people and pay higher wages. As a result, spending power goes up as well.

Real GDP is one of the most important topics in macroeconomics. Its role is to measure the average level of national income adjusted for inflation. Even a slight decrease in GDP can impact customer purchasing power and spending patterns, which in turn affect your business.

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A country's real GDP can drop as a result of shifts in demand, increasing interest rates, government spending reductions and other factors. As a business owner, it's important to know how this number fluctuates over time so you can adjust your sales strategies accordingly.

Changes in Customer Spending

Any reduction in customer spending will cause a decrease in GDP. Customers spend more or less depending on their disposable income, inflation, tax rate and the level of household debt.

Wage growth, for example, encourages more expensive purchases, leading to an increase in real GDP. If inflation increases, customers can no longer afford to buy their favorite products at a reasonable price, so they reduce their expenses. These shifts in demand will negatively impact the real GDP.

Rising Interest Rates

When interest rates go up, so does the cost of borrowing money. As a result, disposable income decreases, which limits customer spending. These factors cause a reduction in GDP, affecting economic growth.

Companies that sell high-end goods, such as automobiles, are particularly vulnerable to rising interest rates. Since most customers need to borrow money to purchase these products, they will either postpone their plans or choose cheaper models.

Government Spending Reduction

Governments spend money on a variety of goods and services, such as buildings for schools and hospitals, housing programs, public safety, social protection and more. Additionally, governments pay public employees and independent contractors who work on various projects. One impact of government spending reduction is a decrease in GDP.

For instance, if the government decides to cut wages and reduce social benefits, public employees will earn less. Furthermore, individuals who receive social benefits can no longer afford to buy certain goods. As a business owner, you may lose customers and revenue. These factors affect a country's real GDP and the overall economy.

Environmental Factors

Economic activity depends on environmental factors, such as weather and climate. For example, customers will spend less and save money during extended periods of cold weather. Furthermore, fast rises in the prices of oil and other commodities affect their spending habits. Any changes in the availability of natural resources will impact the economy and hence, the real GDP.

Rising unemployment rates, inflation, trade balance changes and falling real wages play a role, too. Each of these factors can negatively affect the real GDP, leading to a loss of revenue for businesses.

About the Author

Andra Picincu is a digital marketing consultant with over 10 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. She holds a BA in Marketing and International Business and a BA in Psychology. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Current and former clients include The HOTH, Bisnode Sverige, Nutracelle, CLICK - The Coffee Lover's Protein Drink, InstaCuppa, Marketgoo, GoHarvey, Internet Brands, and more. In her daily life, Ms. Picincu provides digital marketing consulting and copywriting services. Her goal is to help businesses understand and reach their target audience in new, creative ways.

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