If you've ever wondered why some countries are more financially stable than others, the gross domestic product or GDP is a major marker. It's used to measure the performance of a country's economy and is often referred to as the "size" of the economy. Because an economy's success is judged by growth, it's often referred to in comparison from the previous quarter or year. If it falls, the country is facing economic weakness. If it rises, the country's economy is strong, which has a significant effect on the country's place in the world, especially regarding trade and investments. A GDP can't make or break an individual business because it's the result of how a country's businesses are doing as a whole. Still, it can undoubtedly hinder a business's growth in many ways.
What Is a GDP?
A GDP is the total value of all goods and services produced within a country during a specific period. You can get the GDP by either adding up what everyone in a nation earned during a particular period or adding up what everyone spent. The period typically ranges from quarterly to yearly. When the GDP rises, it indicates economic growth. If the GDP falls, it can show a national recession. This number is used by governments and private companies to predict various markets. In the United States, The Bureau of Economic Analysis releases global GDP data for most countries annually. Stats for the United State's economy are released quarterly.
The GDP Affects Your Interest Rates
In the United States, the GDP has everything to do with how much interest businesses have to pay. The Federal Reserve reviews the GDP to reset interest rates regularly. If the economy appears to be stalled, the Federal Reserve will lower interest rates to foster growth. This is a great time for a business to take out a loan – and that's exactly what the Federal Reserve wants. If the GDP is growing, the Federal Reserve will raise interest rates to control inflation and slow businesses down.
Companies Use the GDP to Predict Business Growth
Globally, the GDP is an indicator of how a country's economy is doing. This means a business can use it to predict whether their industry will grow or if it will falter. When the GDP falls, companies may opt to start saving extra cash as a backup, which means layoffs and cost-cutting measures. If the GDP is booming, a business may choose to expand. For example, they might hire new employees, pay higher salaries, open new departments and promote more products.
Investors Pay Close Attention to the GDP
It's a risky decision to invest in any business headquartered in a country whose GDP is plummeting. For this reason, sharp changes in the GDP have a significant effect on the stock market. In a poor economic climate, stock prices tend to shrink because it's believed that businesses as a whole will be making less money. Then again, it could be a great idea to invest if the GDP is expected to rise, but is currently at a low. Either way, it's difficult for companies to find investors – be it privately or on the stock market – if the GDP is faltering.