Factors Influencing GDP Growth and Stability

Elements Influencing the GDP:

Consumption:

Consumption is the value of goods and services bought by people.

An increase of consumption will cause GDP to increase. This means there is an increase in living standards as more people can consume higher levels of goods and services.

Increased GDP per Capita will improve government finances. This is because people will pay more income tax and more VAT; firms will pay more corporation tax. Also, the government will spend less on income support and unemployment benefits. Therefore, the budget deficit will decrease. Also, the government could decide to spend more on investing in the economy, e.g. spending on better roads. This will enable higher rates of growth in the long term.

An increase of consumption will immediately push up imports. An increase of domestic consumption might decrease exports, since at the same level of production firms would prefer to sell inside the country.

Investment:

The GDP increases when businesses invest money in infrastructure, real estate, and other physical operations.

Financial investment can also have an impact on other GDP factors, such as consumer spending, by creating jobs and creating buying power for consumers.

When a business cannot afford to invest in new inventories; that effect translates into economic uncertainty.

Without investment, an economy could enjoy high levels of consumption, but this creates an unbalanced economy. There will tend to be a current account deficit.

Government Purchases:

Current Account:

Unemployment:

Measured as the ratio between people actively seeking employment and the active population.

Employment ultimately affects C (disposable income) and G (taxes funding purchases), which ultimately affects I (why invest if you can’t sell) Okun’s law.

Growth of GDP and Unemployment are negatively correlated. This is not a structural feature of the economy but a statistical relationship. Interesting but arguably stable.

Productivity:

Productivity affects:

• CA, since it determines our competitive advantage in the global market.
• C, I, G; increases in productivity have three potential effects: decrease price, increase salaries, or increase benefits. That means increase the income of the factors of production, or transfer the improvement to the market - consumers. With that “extra” income factors individuals can buy more (C), companies can invest more (I), and governments collect more taxes (G).

Productivity depends on K, L, and A.