Essay on the Real Gross Domestic Product and Personal Consumption Expenditures

A vehicle (truck) was the recent big purchase. The first big purchase as an adult was a van bought after getting this job. We visited the dealership with hopes of walking out with a new van that day. Unfortunately, we were not aware that there was a need for a co-signer because of lack of credit. However, because of the low personal credit, we sought out to co-sign the loan. As a result of the co-signing the loan, we qualified for 4.5 % interest rate. However, we recently bought a new truck without needing a co-signer, at an interest rate of 7%.

Keywords: Credit, interest rate, PCE, GDP, Effective Federal Funds Rate, Inflation

Introduction

Gross Domestic Product refers to the total monetary value of products (good and services) that are produced and rendered in a year within a country. Additionally, the GDP is calculated annually, but for analysis, it may be calculated daily, monthly, or quarterly. Similarly, consumption and investments (public and private), government outlays and projects, and exports (less imports) are the main GDPs components in a country. In general, GDP means the average estimation of the entire economic activities of a specific region or country.

On the other hand, personal consumption expenditure (PCE or PCE index) is defined as the measurement of price changes for services offered/rendered or goods consumed in a specific region or country. Expenditures included in the PCE index include the actual expenses allocated to Americas households. PCE index is deemed as a predictable and reliable indicator of a country or regions general economic stability. For this reason, the PCE is widely applied by financial analysts as a tool or indicator to estimate the selected country or regions overall economic progress (Effective Federal Funds Rate, 2017). The United States GDP for the past ten years as measured from 2007-2017 is represented in the following Graph 1 (Appendix), and it describes the GDP trend for this period:

Americas PCE has witnessed a significant growth for the 10 years too. From Graph 2 (Appendix), the PCEs figure has persistently increased since 2007 until last year, 2017 and this indicates that the price changes for both services offered/rendered and goods consumed in a specific region or country has also gone high (Real Gross Domestic Product, n.d.). If the USs GDP and PCEs results last ten years are contrasted, the outcome is that the overall GDP has relatively increased more than the PCE. Moreover, the GDP remained higher compared to the PCE. This indicates that the overall economic growth of the US has been impressive. Additionally, prices of services and goods have also gone up significantly although they have generally been within the consumers reach over the time which has resulted from the GDP is higher compared to the PCE. It also indicates that consumers held sufficient money which was enabled by healthy economic activities and they could pay higher prices for goods and services consumed.

In the US, the Effective Federal Funds Rate refers to the effective interest rate upon which the institutions which take deposits including credit unions and banks lend their reserve balances and surplus to other institutions. Similarly, the graph indicating the changes in the rates for the past 10 years is represented in Graph 3 (Appendix). From this graph, results show that the Effective Federal Funds Rate has remained low over the past 10 years. Additionally, it indicates that the interest rate by the depository institutions during surplus funds lending has been low too. Additionally, the results indicate that individuals and organizations expecting to borrow had continued to be relaxed and comfortable when borrowing funds meant for meeting their set goals. Nevertheless, the Effective Federal Funds Rate has increased from 2016, January. This change can be attributed to the change in the government (regime) where uncertainty and insecurity created have influenced the institutions to increase their lending rates.

Lending goes hand in hand with inflation. Thus, inflation refers to the rate increase in the overall prices levels for services and goods at a certain time. Thus, with the inflation rate going up, consumers purchasing power has decreased. It means that the region or the countrys ideal scenario would be introducing price cap for both goods and services or limiting inflation to sustain economic stability and avoid deflation in the process. The general trend of inflation for the past 10 years is as shown in Graph 4 (Appendix).

From the graph, the results indicate that inflation decreased significantly roughly in 2008. This trend can be mainly attributed to the recession back in the days that cost people their earnings and significantly reduced the countrys overall economic activity in the process. Nevertheless, beyond 2008, the inflation seems to have been more stable which shows that the prices of services rendered and goods consumed have been sustained a constant high. Additionally, consumers were using their surplus funds, due to the remarkable GDP growth, on the prices. Comparing inflation with the Effective Federal Funds Rate for the past 10 years, one can conclude that the lending (interest) rate has remained that low because the inflation has been higher over the time.

The latest big purchase, the truck, was acquired on a 5-year lease program. Before then, we (family) bought the first car with no knowledge about such important aspects and the majority of the payments within the first year went directly to the interest. With time and knowledge, personal credit grew, and we could afford the new truck at 7% interest rate (Bankrate.com, n.d.). Although the interest rate is high, we consider it better than in the first big purchase because overall economic conditions were relative worse back then. The low Effective Federal Funds Rate and the impressive economic activity resulted in a GDP growth, and this enabled me to pay off loan installments with ease. Additionally, the government influence played a vital role in making the decision as the car prices were high, but the Effective Federal Funds Rate remained low.

The knowledge on the entire subject assisted making the correct decision because we opted to pay high down payment and as the Effective Federal Funds Rate was still within the reach. Luck enough, we never paid most of the finances in interest form. Additionally, we were able to efficiently pay the installments and the plan (Federal Reserve Bank of St. Louis, n.d.). Moreover, the overall economic situation in the country was good for the five years and from 2012 to 2017, a car lease program on a lower lending rate was dreamt come true. Similarly, the terms and conditions for the installment were flexible, and this helped manage the affairs and funds the best way possible (Personal Consumption Expenditures, n.d.).

References

Bankrate.com, S. P. (n.d.). Interest rates to creep higher in 2017. Retrieved from http://www.bankrate.com/finance/mortgages/interest-rates-forecast.aspxEffective Federal Funds Rate. (2017, March). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDSFederal Reserve Bank of St. Louis. (n.d.). 10-Year Breakeven Inflation Rate [T10YIE]. Retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10YIE.

U.S. Bureau of Economic Analysis. (n.d.). Real Gross Domestic Product [GDPC1]. Retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1.

U.S. Bureau of Economic Analysis. (n.d.).Personal Consumption Expenditures [PCE]. Retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCE.