The Gross Domestic Product is the economic measurement of all finished goods and services produced by all workers and companies within the borders of the United States. GDP's effect on business is relatively minor from the standpoint that GDP is created as a result of business activity. Hence, business affects GDP. However, GDP is a macro economic indicator of the strength of business, relative wealth of workers and the overall strength of the economy and is used by business and investors to determine efficient capital deployment.
GDP's Effect on the Macro Economy
GDP is reviewed by the Federal Reserve to reset interest rates. During periods of economic growth the Fed will increase interest rates to slow business activity in order to control inflation.
When the economy is contracting GDP will dictate that interest rates be lowered in order to stimulate business and consumption. Lower interest rates means that the cost of capital is cheaper for businesses and consumers when they take on debt. The theory is that lower rates will stimulate economic activity.
Negative GDP Numbers Effect on Business Decisions
Business uses GDP numbers to determine whether to increase or reduce employment. In addition business evaluates business opportunities domestically in order to develop their cash deployment strategies.
For instance, if economic growth is down then the company will set aside more cash in case sales continue to decline. Management will evaluate capital expense projects based on GDP data and will not invest in plant and equipment during recessionary times. The result is a self feeding economic decline that will continue until a positive catalyst changes sentiment.
Positive GDP Numbers and Their Effect on Business
Positive GDP growth numbers provide a catalyst that builds confidence so that business feels comfortable spending money on hiring new employees, expanding operations, buying new equipment and building new plants.
These events are what drive US economic growth which is achieved through the creation of jobs, which leads to more consumption via demand for goods and services because more people are engaged in economic activity, thereby necessitating an increase production of goods and services.
GDP, Government and Business
Business also evaluates the GDP of other countries in an effort to exploit capital investment opportunities, increase markets or to move operations. Therefore, government's intervention into business and markets can have unintended consequences that force business out of the country due to regulatory or other government policies viewed by business counterproductive.
In the end the government uses the GDP numbers to attempt and manipulate and control the economy while business uses the GDP data to make strategic business decisions in spite of the government’s intrusions.
- Thinkstock/Comstock/Getty Images