GDP measures a nation’s total expenditure on goods and services produced in a single year. Since the expenditures on goods and services are based on the price level during that period, therefore, the GDP is adjusted through the price level. The adjusted GDP is called Real GDP. Interest rate is one of the tools which helps in influencing GDP. Although, interest rate is not directly linked with GDP since increasing or decreasing the interest rate doesn’t affect GDP but it can affect the employment level which in turn changes the output level (GDP). One of the concepts that reside in the horizon of GDP pertains to Gross Domestic Income (GDY) which represents the total income of the nation in a year. For an economy as a whole, the income (GDY) equals expenditure (GDP). It is so because every dollar of spending by a buyer is a dollar of income for some seller.
The second component APE relates to the economy’s total demand for goods and services in the country’s output. Technically, it is the sum of consumption, investment, government expenditures and net export. Consumption is the demand for current output by household sector incorporating both demands of domestic and foreign goods &. services. Investments are the business sector demand while government purchases are expenditures made by the government. GDP and APE are strongly correlated and APE shows a quick response to a change in GDP. As for the manipulation tools are concerned, research proves that interest rate is not linked with consumption derived by household sector because there is an offsetting behavior in the household sector due to interest rate. However, there is a close relationship between interest rate and net exports in the equation. Overall, the interest rates &. APE are negatively interlinked and APE responds slowly with the impact of interest rate.
The aggregate supply of funding (ASF) is .the source which finances the domestic demand or alternately APE. .