How the GDP Affects Supply & Demand

The gross domestic product, or GDP, is a national indicator that represents the total demand for a nation’s goods and services over a given period. The response to changes in the GDP has an indirect influence on the local supply and demand for goods and services in a nation. These responses are necessary in order to stabilize a nation’s economy, aiming toward long-term stable growth.

Sharp increases in the GDP, or large increases in the overall demand for a nation’s goods and services, can lead to long-term inflation. Inflation is the rise in cost of goods and services as a result of the increased demand. As a result, the Federal Reserve can increase the national interest rate. An increase to the national interest rate increases the cost of credit in the nation, decreasing consumer demand and reducing the rate of continued growth of the GDP. High interest rates force consumers to reconsider large purchases, such as homes or cars, while decreasing consumer reliance on debt.

A decrease in the GDP over time represents a reduction in the overall demand for a nation’s goods and services. The Federal Reserve can respond to a reduction in the GDP by lowering interest rates. Lowered interest rates make large purchases, such as a home or new car, more appealing to consumers, while allowing banks to transfer more money into the economy in the form of loans. Additionally, lower interest rates make business ownership more appealing and provide entrepreneurs the investment opportunities to open new businesses. The overall response increases consumer demand, while opening new opportunities for market supply.

A stable GDP represents a growth in the nation’s economy that is slow enough to avoid inflation. The Federal Reserve will tend to leave interest rates alone during times of stable GDP growth, allowing for the current levels of supply and demand to continue as they are. Consumer demand will tend to remain stable during these periods, while market supply will grow at a reasonable rate. A stable GDP growth rate is the economic goal for a nation’s government.

The GDP represents the nation’s aggregate demand, or overall market demand for the nation’s goods and services. On an international level, this can help you compare national markets and determine the growth or decline of international market demand. International business can watch these markets and make decisions about new markets, or new supply opportunities, to branch into.