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What Factors Affect Real GDP Growth?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 25 June 2014
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Real gross domestic product (GDP) represents the method by which economists assess growth in a country's economy. This particular measure considers inflation in the final results. Real GDP growth can be affected by various factors but there are some primary drivers of this type of expansion in an economy. Consumer spending can be a significant driver of this economic barometer. Other factors that influence GDP include the pace at which businesses and government agencies spend money.

Economists heavily consider consumer spending when assessing growth in regional economies. In some countries, personal consumption, which represents consumer spending, is the largest consideration in determining real GDP growth. When adjusted for inflation, data results are typically less rosy then they would be on a comparative basis, which does not take the changing value of a country's currency into account. Consumer spending data can similarly be reported in real dollar figures and may be adjusted for inflation. Rising personal consumption in real figures typically affects real GDP in a positive manner.

International trade also affects a nation's economic stability. The greater the export activity, the more business the country is receiving from other countries. When export activity is rising, it is likely to drive real GDP growth in that region. International trade demand is measured across various industries, including retail and manufacturing.

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During periods when international trade demand is increasing, any weaknesses in a local economy can become less influential and economic expansion may still occur. If the rate of imports is outpacing exports, however, the increases in international commerce can are likely to be less effective. Rising inventories in the business community can affect real GDP in a positive way if the increase in supply occurs when consumer demand for goods is high. Otherwise, excessive inventories may only stall economic expansion.

A government agency's ability and desire to spend money toward improving economic conditions in a country feeds into real GDP growth. Often, a government will take the role of funding projects, such as infrastructure development, that the private sector does not typically finance. A government may also spend large sums of money on defense items for the military in a country. All of these activities may have a strengthening affect on an economy. In the event that a government begins taxing citizens more money to continue spending at a certain pace, however, the spending impact is likely to become weakened.

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Logicfest
Post 2

One fascinating point for discussion when talking about GDP is what impact consumer debt has on both short-term and long-term GDP. In other words, if we borrow huge amounts of money to finance things in the short-term, do we pay for it by drops in long-term GDP? Or, does easily available credit have a real, long-term impact on GDP at all?

This topic has been discussed and debated at length by economists in the wake of the "credit crisis" that hurt housing markets all over the nation a few years ago. Oddly, no one seems to be able to agree as to what real impact consumer debt has on GDP.

Odd...

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