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What Factors Affect GDP Projections?

Felicia Dye
Felicia Dye

Money supply and interest rates are two factors that may be factored into GDP projections. Spending by households, businesses, and governments serve as further indicators of the health of an economy. Owing to the fact that unemployment has an impact on household spending, it too is commonly factored into calculations. There are different ways that GDP projections can be calculated, and results consequently often vary based on who does the calculations.

The amount of money circulating in an economy, or the money supply, is one of the factors often considered in GDP projections. This is due in part to beliefs that the amount of money circulating affects inflation, which is the reduced purchasing power of a given currency. According to many, more money equals higher inflation due to increased competition to purchase the goods and services that are available.

The purchasing of durable goods, like furniture, can indicate the health of the economy.
The purchasing of durable goods, like furniture, can indicate the health of the economy.

Interest rates may also be considered in GDP projections. Central banks often change these rates to either make borrowing cheaper or more expensive. This can have an impact on the money supply because when money can be obtained at low borrowing costs, it is expected to flow more freely throughout the economy, which is why some governments consider lowering interests rates as a stimulus measure.

Interest rates can also impact employment and unemployment, another one of the factors commonly considered in GDP projections. Workers are considered human resources because they are essentially tools for production. GDP is a measure of the services and goods that an economy is producing, and when unemployment rates are high, that means that there is a large number of resources that could be used to grow the economy but that are not being utilized. On the contrary, when unemployment is low, this should represent positive growth because the available human resources are readily at work producing things.

Employment also matters because most people rely on their jobs to support themselves. Without those jobs, individuals' standard of living tends to decline as they have less money to spend on maintaining their lifestyles. The consumption of durable and non-durable goods is a major factor in GDP projections. Consumer spending on services, such as auto repair, child care, and medical treatments, are also important.

Spending by companies should have its place in determining gross domestic product. The amount of money that businesses are investing in their operations with purchases of items such as production equipment, new facilities, and office equipment usually reflects the health of the economy in which they are operating. During times of slow growth, companies generally spend less money, which can perpetuate the problem.

Government spending is generally considered in GDP projections. With all of the levels of government that often exist in a society, collectively they can account for a significant portion of an economy's jobs. In addition to the governments' role as an employer, an economy usually benefits from government spending on items such as military equipment and infrastructure. Sometimes government spending is intentionally used to stimulate an economy. For example, a nation may decide to update its roads and bridges during a period of economic decline.

Although not a formal consideration in GDP projections, the party making the calculation also affects the outcome. Forecasting gross domestic product is not an exact science. The factors that are considered and how they are applied can vary and therefore the projections also tend to vary.

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    • The purchasing of durable goods, like furniture, can indicate the health of the economy.
      By: Dmitry Pistrov
      The purchasing of durable goods, like furniture, can indicate the health of the economy.