Economic terms you should know: Gross Domestic Product and interest rates explained by FXMAG.COM

The ECB And The Bank Of England Are Both Expected To Raise The Interest Rates By 50bp

In the world of economics, we use many indicators to describe the situation of a farm. A lot of these are important, but GBP is really essential. Recently, the situation of the economies and markets has been influenced by interest rates. But what exactly can we learn from these data, decisions?


What is Gross Domestic Product (GDP)?

We often Hear that some economy is expecting growth, but what does that mean?

Read more: The US Economy Expects Growth (GDP) In The Last Quarter (Q3) | FXMAG.COM

By definition, gross domestic product is the monetary value of all finished goods and services produced in a country during a specified period. GDP is an economic snapshot of a country that is used to estimate the size of an economy and its rate of growth. GDP can be calculated in three ways using expenditure, production or income. It can be adjusted for inflation and population to provide deeper insight.


Gross Domestic Product let us look into health of economies


What do we learn from GDP?

It gives us some idea of where the national economy is going we can determine whether the economy is developing and how fast. It is thanks to this that we can learn about a recession or the growth or stagnation of farmhouses. Governments and other entities such as central banks can adjust their actions by knowing the results. If growth slows, they can introduce expansionary monetary policy to try to stimulate the economy. If the pace of growth is solid, they can use monetary policy to slow things down and try to fight off inflation.

Moreover, it enables analysts to compare countries economically. However, it should not be treated as a hard economic indicator, because there are many gaps in this method of "measuring the economy". Since GDP is a direct indicator of the health and growth of an economy, companies can use GDP as a guide in their business strategy.


There are also types of GDP. The main ones are:

  • Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. All goods and services counted in nominal GDP are valued at the prices that those goods and services are actually sold for in that year.

  • Real GDP is an inflation-adjusted measure that reflects the number of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time.

  • GDP per capita is a measurement of the GDP per person in a country’s population. Per-capita GDP shows how much economic production value can be attributed to each individual citizen.


When a central bank lends money - what is interest rate?

Interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate also applies to the amount earned in the bank or the cashier from the deposit account.

The interest rates charged by banks depend on many factors, such as the state of the economy. A country's central bank sets the interest rate each bank uses to determine the APR range it offers. When the central bank sets interest rates high, the cost of debt goes up. The high cost of debt discourages people from taking loans and slows down consumer demand. So it helps against inflation, but it is negative for borrowers because the cost of debt rises and sometimes it can be difficult to pay off. In the situation of some households, this state of affairs can cause financial problems, such as indebtedness to friends or elsewhere, and directly affects the standard of living.



Stimulating economies

On the other hand, economies are often stimulated during periods of low interest rates because borrowers have access to cheap loans. Because the savings rate is low, companies and individuals are more likely to spend and buy more risky investment instruments such as stocks. This spending fuels the economy and injects capital markets.

Simply put, for economies interest rates are crucial because they help stimulate their growth and also help in times of high inflation.

Sources: Dictionary Of Economics And Commerce

The ECB And The Bank Of England Are Both Expected To Raise The Interest Rates By 50bp

Kamila Szypuła


Kamila has a bachelors degree in economics and a master's degree in finance and accounting, specializing in banking and financial consulting

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