What Causes GDP to Increase or Decrease?

There are many different things that affect the GDP, or gross domestic product, including interest rates, asset prices, wages, consumer confidence, infrastructure investment and even weather or political instability. All of the factors that affect GDP can be categorized as demand-side factors or supply-side factors.

Demand-side factors, such as interest rates can affect the spending power of customers. Lowering the interest rate decreases the monthly mortgage rates, which leaves more spending money for families, where higher interest rates can cut down on family expenditure. Consumer confidence directly affects how much people will spend or save. Wages affect GDP when there is low or high inflation because people’s money cannot stretch as far during high inflation periods, and they are likely to cut down on purchases.

Supply-side factors, such as the level of infrastructure development can affect how companies can supply their goods or services. Without good roads and communications, a company may not be able to be competitive. Human capital, which is the productivity of a workforce, can be increased by investment in the education and training of employees and can utilize new technologies and more sophisticated production processes.

Weather, political instability and commodity prices also influence the growth or contraction of the economy. With long periods of cold weather, people will shop less and save more. Fast rises in the prices of commodities, such as oil, can affect the spending habits of consumers looking to cut back.