What is GDP growth rate and how to calculate it

Since the media often talk about the growth rate of an economy, it is important to clarify and to correctly define what the growth rate of GDP is. This indicator has a lot more meanings and it can be used to measure different components of a country’s economy. Nevertheless, it generally gives an idea of the economic growth or the economic decline.

Just like any other growth rate, GDP growth rate represents the percentage change in GDP over a specific period of time. The formula can be seen below:

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When GDP growth rate is expressed for a period less than a year, it is often annualized, by converting the growth rate measured within a limited period of time to the growth over a year’s time, assuming that the growth rate remains constant. In other words, for GDP which is reported quarterly, the annualized GDP growth rate is approximately four times the percentage change of GDP in the previous quarter. Although there are several computation methods for the annualized GDP growth rate and the results are slightly different, multiplying the GDP growth rate over one quarter with four gives a close estimate.

GDP growth rate can be expressed in nominal terms, as well as in real terms. The latter is often known as real GDP growth rate. This is a measure of a nation’s GDP growth from one year period to another, expressed as a percentage and adjusted for inflation.

The economic interpretation of GDP growth rate is vast. However, an immediate conclusion that one can draw is that when the economy is expanding, the GDP growth rate is positive which translates into more jobs, more profitable businesses, higher personal income, etc. On the contrary, when the economy contracts, GDP growth rate is negative and the economy shows recessionary signs such as increased unemployment rates, reduced investments, stagnation or reduction of salaries.

While it is quite difficult to compare GDP of two or more countries, since they can be computed differently, it is far easier to compare GDP growth rate. No matter the method used to calculate GDP, GDP growth rate actually shows how performance of  a country is in terms of working out those factors that drive GDP.

The media nowadays are using the term economic growth rate to talk about GDP growth rate, namely the change in a nation’s GDP over one year period. However, economic growth rate is not adjusted for inflation. Therefore, to have a better perspective of how well or poorly a country is performing from an economic point of view one should calculate the real GDP growth rate.

Just like GDP can be calculated using several approaches, real GDP growth rate can be computed as the annual growth rate of GDP volume. Hence, GDP at current prices is valued in the previous year prices, so the computed volume changes are imposed on the level of a reference year. This is called a chain-linked series. The advantage of using this method is that price movements will not inflate the growth rate.

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Written by Valeria Popa.

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