What are the consequences of a negative GDP gap?


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  • What is GDP?

Gross Domestic Product (GDP) is used to gage the health of a country's economy. It is a figure representing the total value of goods and services produced by a country over a given time .

GDP is measured by comparing a previous quarter's amount of GDP, with that of the most recent quarter. Simply put, this means that if the Gross Domestic Product is up on the previous three months it is growing. Conversely if the figure is negative, the economy is therefore shrinking.

A contraction, or negative figure in two consecutive periods is known as recession. Two recessions are called a double dip recession.

  • How do you measure GDP?
GDP can be measured in three possible ways, with each producing the same outcome.

Expenditure Measure; the value of the goods and services purchased by governments and households, including all exports and imports.

Income Measure; the value generated by the income of profits and wages.

Output Measure: The value of all goods and services produced by an economy, including the sectors of manufacturing, agriculture, energy, construction and the government and service sector.

  • What is GDP used for?
As well being used as a forecast for determining the the state of the economy, GDP is used by banks and governments as a key indicator to set interest rates.

The treasury department will also utilize GDP when planning future economic policy. For example when an economy is in a negative contracted state, taxes and spending will be adjusted accordingly.

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