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What Is the Role of GDP as an Economic Indicator?

The purchasing of durable goods, like furniture, can indicate the health of the economy.
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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 24 June 2014
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The Gross Domestic Product (GDP) is the most important economic indicator due to the role it plays in the analysis of the state of the economy in a nation. Governments and various businesses depend on the publication of the GDP as an aid to gauge the state of the economy, so as to incorporate the information in the development of effective governmental and business strategies. The role of the GDP as an economic indicator includes its ability to affect financial markets. The GDP is made up of factors like net exports, total consumer consumption, total government consumption and changes in inventories. It also includes an assessment of the fixed investment.

The consumer consumption makes up the majority of the GDP. The role of the GDP as an economic indicator includes the calculation of consumer goods and products, which include durable goods, nondurable goods and the consumption of services. The rate at which consumers buy durable goods like cars, houses and other items that are expected to last over three years is included in the role of the GDP as an economic indicator. This is in addition to the consumption of nondurable goods like food and various services offered by different businesses. This knowledge allows the related parties to find out how the market sector is performing. A rise in the consumption of goods and services is just as significant as a drop in consumption.

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In terms of the role of the GDP as an economic indicator, a rise in the demand for consumables can indicate a boom in the economy, while a drop in demand can indicate an inflation. Such indices affect matters like stock prices, exchange rates and interest rates. When demand is high, the financial institutions responsible for setting interest rates will consider if the demand is growing at a rate that is not sustainable. For instance, if the housing market is growing at a rate that is considered too fast, the central bank of the country may decide to increase interest rates. This will cause banks to increase the charges on loans as well as increase the interests on savings.

Such a strategy will cause people to reduce the rate at which they obtain loans and encourage more people to save their money. The move will also cause the demand levels to eventually fall and to subsequently stabilize the market. This role of the GDP as an economic indicator is important because an unsustainable and unmanageable rise in consumer demand will cause a boom that will eventually lead to a free fall that may lead to a recession.

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