How to Calculate Economic Growth Rate?
Economic growth rate typically refers to the increase in the inflation-adjusted market value of the goods and services produced by an economy over a specific period. It is conventionally measured in percentage terms since it is the most supportive way to make a comparison over time and space.
The GDP growth rate formula is straightforward:
Usually, the real inflation-adjusted GDP is used for the calculation since it removes the effect of the rising price level. Rising prices can be a result of multiple factors — even a change in consumption tax rates (e.g. VAT or sales tax) can cause a shift in prices.
Economists often focus on the percentage change in the real GDP per capita because it improves the comparison between countries and also isolates the effect of changing population.
Real-World Example (US Economy 2017)
The real GDP in the United States in 2017 was 17,304,984 million USD and in 2016 was 16,920,328 million USD. Applying the GDP growth rate formula:
Therefore, the real GDP growth in the United States in 2017 compared to the previous year was 2.27% — a decent figure for a developed country in a worldwide comparison.
Source: data.worldbank.org
Importance in Economics
The GDP growth rate formula is an important supplementary indicator of the gross domestic product since it provides key information about the development and progress of a given economy. In other words, measuring the economic growth rate provides essential guidance to the government and policymakers as it indicates the dynamic feature of economic performance.
Dynamic economic growth gains particular relevance in the long run. Consider a country with a real GDP per capita of around half the US GDP per capita — for example, Poland:
- At 1% growth per year — it would take nearly 70 years to double.
- At 2% growth per year — it would take only 35 years to reach the US level.
This is a vast difference — and it is explained by the power of compounding growth (see the Rule of 72).
Interesting Facts
- The US economy experienced the fastest economic growth in the 19th century, on average by about 4.5% per year. In the 20th century, the US economy grew by about 3.5% per annum.
- From 1800 to 2000, no other nation — except Luxembourg — managed to grow at a pace as high as the US. By the year 2000, the US was the second wealthiest country in the world. Luxembourg was the richest per capita (Sabillon, 2005).
- The very first person who connected the concept of growth and the growth rate of the national income (the predecessor of GDP) as a measure of economic progress was British economist Colin Clark at the beginning of the 20th century (Lepenies, 2016).
- A GDP growth rate of about 2–3% is generally considered healthy for a developed economy; rates above 4% are typical of emerging economies.
- Two consecutive quarters of negative GDP growth constitute a technical recession.
FAQs
How does GDP growth rate affect employment?
During periods of positive GDP growth, businesses often expand and create more job opportunities, leading to lower unemployment rates. Conversely, during periods of negative GDP growth, companies may cut back on hiring or lay off workers, resulting in higher unemployment rates.
What does a negative GDP growth rate indicate?
A negative GDP growth rate indicates that an economy has contracted over a given period. It suggests that the value of goods and services produced within the economy has decreased, which can signify an economic downturn, a recession, or a contraction.
What is the GDP growth rate if the current GDP is $5,000,000,000?
Assuming that the previous GDP was $3,000,000,000, the GDP growth rate will be 66.67%. You can calculate this using the formula:
GDP growth rate = (5,000,000,000 − 3,000,000,000) / 3,000,000,000 × 100 = 66.67%
Which currencies can I use for this calculator?
This calculator supports 15 major world currencies including USD (US Dollar), RUB (Russian Ruble), EUR, GBP, JPY, CNY, INR, CAD, AUD, CHF, BRL, MXN, KRW, TRY, and SAR. GDP values can be entered in millions, billions, or trillions.
What GDP scale should I use?
For most country-level GDP data reported by the IMF or World Bank, millions is the standard unit. For example, the US GDP in 2017 was reported as 17,304,984 million USD. If your data source reports in billions or trillions, select the corresponding scale.