The Relevance of the Prime Interest Rate, Gross Domestic Product, and Gross National Product
The Prime Interest Rate is the rate of interest that commercial institutions charge their customers, mostly large corporations that are creditworthy (Atesoglu, 2003). It is usually influenced by the federal funds rate, which determines the rate at which commercial banks lend to each other. The Prime Interest Rate is the basis of most other interest rates such as rates for mortgages and personal loans (Atesoglu, 2003). Banks may offer lower rates for well-qualified customers, below the set percentage. For PepsiCo, the prime interest rate is relevant in two main ways: the rate at which banks can lend to the company is determined by the creditworthiness of the company, and the rate affects liquidity in the financial markets. To improve its creditworthiness, PepsiCo can, for instance, pay off its debt and resort to equity for financing operations. This would result in the bank getting loans from banks at a lower prime interest rate. This would be desirable since an increase in the prime interest rate would increase the monthly payments that the company makes. Getting loans at a lower prime interest rate would increase liquidity and provide the company with an opportunity to expand operations.
The Gross Domestic Product (GDP) refers to the total value of all that is produced within a country (Argandoña, 2016). It is a measure that is used by economists and governments to analyze the size and performance of an economy. GDP impacts investment, personal finance, and the rate of job and economic growth. Investors consider GDP when making decisions on the adjustment of asset allocation and investment in different sectors. They also consider GDP when making decisions on which international opportunities to take advantage of. For PepsiCo, monitoring GDP is important for purposes of making decisions on which countries to setup facilities or targets for investment. GDP is also relevant where the company may be looking for opportunities to realize growth through mergers or acquisitions. Such activities should only be undertaken in countries showing rapid GDP growth. The company can also use GDP data to determine whether targeted markets and sectors are growing or declining, informing decision making. Decisions such as increasing the labor force, increasing investment in research and development, and increasing foreign investment will require GDP performance data.
Gross National Product (GNP) refers to a measure of the total value of all services and goods produced by the residents and businesses of a country, regardless of their production location (Argandoña, 2016). It is equal to the summation of an economy’s GDP with all the income earned by the economy’s residents and companies through foreign investments, minus all the income earned inside the country by foreigners and foreign companies. The GNP provides an indicator that is more reliable than GDP in the measurement of the performance of an economy. The measure provides information on inflation rates, savings, manufacturing, investments, production outputs of companies, and employment (Argandoña, 2016). As such, it is relevant for PepsiCo since the company needs such information to make important decisions on investment, countries to expand in, sources of an affordable and readily available workforce, and competition. For instance, the company can use GNP data to determine the production outputs of its competitors. This would provide information necessary to make decisions on marketing and production strategies. The company can also derive information on the rate of inflation in different countries, providing information on which countries would be most profitable and which countries would be the best to invest in.
Argandoña, A. (2016). Gross Domestic Product (GDP) and Gross National Product (GNP). Encyclopedia of Business Ethics and Society, Forthcoming.
Atesoglu, H. S. (2003). Monetary transmission–federal funds rate and prime rate. Journal of Post Keynesian Economics, 26(2), 357-362.
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