Percentage Change in Real GDP and Prime Rate Charged By Banks

Introduction 

Economic development is brought about by the interplay between different economic concepts. For economic development within a country, the concepts ought to balance. The relationship between these concepts is significant in the micro and macro-economic studies. This paper aims at analyzing and graphically represents two concepts in economics which play a major role in the economic balance. The paper aims at comparing through detailed analysis the percentage change in the real Gross Domestic Product (GDP) and the Prime rate charged by the banks. The paper seeks to analyze the two terms based on some issues such as what happens in case one variable increase or decrease, the factors which bring about the changes in each variable and many others. 

Graphical presentation and analysis of the Real GDP and Prime rate 

Real Gross Domestic Product which is also referred to as the inflation-adjusted Gross Domestic Product, measures finished goods or products and services values at a persistent base year ( Kwan, 2010). The inflation or deflation with the use of the GDP deflector and the nominal GDP is the factors which adjust the real Gross Domestic Products. Real GDP in an art shell is the general price level changes in a particular year to have the actual picture of a country economy reflected using a base year. It would be challenging for one to have the amount of output across all years compared in the case from one year to the next, the general price level changes. When valuing the entire output of the economy through the utilization of the base year’s average price, the economist can often use this measurement to have the economy purchasing power, and the potential long-term growth of the country analyzed. 

On the other hand, the prime rate is the rate which the bank charges the preferred or the client with high credit ratings. The primary function of the prime rate is that it is beneficial in determining the cost of borrowing on the short-term loan products. The prime rate depending on the economic climate can be volatile or remain unchanged. The basis of the top rate is the federal fund's price which is usually set by the federal Funds rate. Most importantly, the Federal Funds rate is three times below the prime rate. It, therefore, means that the top rate will always go up in case there is a rise in the federal tariffs. 

There is a distinct relationship between the real GDP and the Prime rate charged by the banks. According to most of the data which has been analyzed in this paper, there is a clear indication that incases there is an increase of the real Gross domestic products; there is an alternative increase in the rate of the prime rate charged by the banks. In case there is a decrease in the real growth domestic product, the prime rate charged by the banks also decreases. The rationale in this relationship is that in case the real Gross domestic product increases; many people demand loans for business and others ( Reinhart & Rogoff, 2010). The banks, therefore, react by increasing the rate of the interest of the loans they offer to their most trusted customers. In case there is a decrease in the real Gross Domestic Products, they are a limited number of clients who are interested in loans. Therefore, the banks reduce their prime rates which they charge to customers as a strategy to lure more customers. 

This is shown in the table below. 

The graph above shows some data representation as deduce from the Federal Reserve Board. In the chart, it is clear that any increase in the real GDP brings about an increase in the prime rate. For instance, the graph indicates that from the third quarter of the year 2015 to the year 2016 second quarter there was an increase in the real GDP. This could be due to the inflation factors, measures of the prices of the goods and services and many others. An example is that the increase can be tuned to the fact that during this time, there was a boom in the economy ( United STates bureau of Economic Analysis , 2013). Therefore, there is more investor in the market who demands a lot of money from the financial institutions. This leads to the banks asking for high prime rates on most of their trusted customers as shown on the graph. On the same note, the real GDP may increase due to increase in the economic inflation. This, therefore, means that the banks will have to look for the alternative ways of coping up or marching the pace of the runaway inflation. It means that they will have to increase the prime rate for their trusted customers. The percentage of the entire relationship is presented on the graph below based on the data collected from the website of the Federal Reserve Board. 

In the graph, the trend shows that from the year 2015 fourth quarter to the year 2016 second quarter, there was an increase in the real GDP. This could be due to the boom of the economy or an increase in inflation. This had an instant effect on the prime rate change as a percentage. It means that the banks adjusted their top speed to suit the changes in the change in the real GDP. 

In conclusion, the data presented and the graph created has shown that there is a relationship between the real GDP and the prime rate charged by the banks to their trusted customers. It indicates that in case there is a real GDP change as a percentage of the economy, the banks respond by increasing their prime rate and hence the percentage change in prime rate increases. 

References 

United STates bureau of Economic Analysis . (2013, September 23rd). Retrieved from http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=6 

Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a Time of Debt (No. w15639). National Bureau of Economic Research. 

Kwan, S. H. (2010). The financial crisis and bank lending . DIANE Publishing.