If you were running a business, would you not want to know how exactly the performance of your business was changing? We're guessing you would. Well, it's the same for countries! Countries measure their economic performance in the form of GDP, and they want this GDP to increase or grow. The extent to which the GDP grows is what we refer to as the growth rate. The growth rate tells you whether the economy is doing well or performing poorly. But how exactly do economists figure out the growth rate? Read on, and let's find out!
Growth Rate Definition
We will determine the definition of growth rate by first understanding what economists mean by growth. Growth refers to an increase in any given value. In macroeconomics, we often look at growth in employment or the gross domestic product (GDP). By this, we are simply looking at whether employment or GDP has increased. In other words, growth refers to a change in the level of a given economic value.
Growth refers to an increase in the level of a given economic value over a given period.
Fig. 1 - Growth refers to an increase over time
We will now make this definition clearer using a simple example.
The GDP of Country A was $1 trillion in 2018 and $1.5 trillion in 2019.
From the simple example above, we can see that the level of Country A's GDP increased from $1 trillion in 2018 to $1.5 trillion in 2019. This means that the GDP of Country A grew by $0.5 trillion from 2018 to 2019.
The growth rate, on the other hand, refers to the rate of increase in the level of an economic value. It was important for us to first understand growth because growth and growth rate are closely related, as we can find the growth rate if we know the growth. However, unlike growth, the growth rate is measured as a percentage.
Growth rate refers to the percentage rate of increase in the level of an economic value over a given period.
- Take note of the difference between growth and growth rate.Whereas growth refers to an increase in the level of an economic value over a given period,growth rate refers to the percentage rate of increase in the level of an economic value over a given period.
Growth Rate Equation
The equation for growth rate is simple; you just convert the change in level into a percentage of the initial level. Let's write out the equation.
\(\hbox{Growth Rate}=\frac{\Delta\hbox{V}}{\hbox{V}_1}\times100\)
Where V represents whatever value we're studying.
Let's make this clearer with an example.
The GDP of Country A was $1 trillion in 2020 and $1.5 trillion in 2021. What is the growth rate of Country A's GDP?
Now, all we have to do is use the following:
\(\hbox{Growth Rate}=\frac{\Delta\hbox{V}}{\hbox{V}_1}\times100\)
We have:
\(\hbox{Growth Rate}=\frac{1.5-1}{1}\times100=50\%\)
There you have it! It's that simple.
Economic Growth Rate
When economists talk about economic growth, it typically refers to a change in the level of GDP over a given period, and the economic growth rate builds on this. The economic growth rate refers to the percentage rate of change in the level of GDP over a given period. Note the difference. However, economists are often referring to the economic growth rate when they talk about economic growth.
Economic growth refers to an increase in the level of GDP over a given period.
Economic growth rate refers to the percentage rate of increase in the level of GDP over a given period.
Now, let's look at an example.
The GDP of Country A in 2020 was $500 million. The GDP of Country A grew by $30 million in 2021. What is the economic growth rate of Country A?
We can then use this formula to calculate the economic growth rate:
\(\hbox{Economic Growth Rate}=\frac{\Delta\hbox{GDP}}{\hbox{GDP}_1}\times100\)
We get:
\(\hbox{Economic Growth Rate}=\frac{30}{500}\times100=6\%\)
It is important to note that economic growth is not always positive, even though it is positive most times. In cases where the economic growth is negative, this means that the GDP in the initial year is higher than the current year, and the output is contracting. If the economic growth rate is negative, then the economy has declined since the previous year. However, the economic growth rate can reduce from year to year but remain positive, and this means that the economy still grew but at a lower rate. Let's have a look at Figure 2 which shows the economic growth rate in the USA from 2012 to 20211.
Fig. 2 - USA Economic growth rate from 2012 to 20211. Source: World Bank1
As figure 2 shows, the growth rate reduced at certain points. For example, from 2012 to 2013, there was a reduction in the growth rate, but it stayed positive. However, the growth rate in 2020 was negative, showing that the economy declined that year.
Per Capita Growth Rate
The per capita growth rate is a way for economists to compare the living standards of people between different periods. But, we must first understand what the real GDP per capita is. Simply put, this is the real GDP of the country distributed across the population.
Real GDP per capita refers to the real GDP of the country distributed across the population.
It is calculated using the following formula:
\(\hbox{Real GDP per capita}=\frac{\hbox{Real GDP}}{\hbox{Population}}\)
The per capita growth is the increase in the real GDP per capita over a given period. This is simply the new real GDP per capita minus the old GDP per capita.
The per capita growth is the increase in the real GDP per capita over a given period.
The per capita growth rate is the percentage rate of increase in the real GDP per capita over a given period. This is what economists refer to when they make statements regarding per capita growth.
The per capita growth rate is the percentage rate of increase in the real GDP per capita over a given period.
It is calculated as:
\(\hbox{Per capita growth rate}=\frac{\Delta\hbox{Real GDP per capita}}{\hbox{Real GDP per capita}_1}\times100\)
Shall we look at an example?
Country A had a Real GDP of $500 million in 2020 and a population of 50 million. However, in 2021, the Real GDP increased to $550 million, whereas the population increased to 60 million. What is the per capita growth rate of country A?
First, let's find the real GDP per capita for both years. Using:
\(\hbox{Real GDP per capita}=\frac{\hbox{Real GDP}}{\hbox{Population}}\)
For 2020:
\(\hbox{2020 Real GDP per capita}=\frac{\hbox{500}}{\hbox{50}}=\$10\)
For 2021:
\(\hbox{2021 Real GDP per capita}=\frac{\hbox{550}}{\hbox{60}}=\$9.16\)
The per capita growth rate can be calculated using the following:
\(\hbox{Per capita growth rate}=\frac{\Delta\hbox{Real GDP per capita}}{\hbox{Real GDP per capita}_1}\times100\)
We have:
\(\hbox{Per capita growth rate of Country A}=\frac{9.16-10}{10}\times100=-8.4\%\)
As you can see, the real GDP increased from 2020 to 2021. However, when the population growth was accounted for, we realized that the real GDP per capita actually saw a decline. This shows how important the per capita growth rate is and how easily misleading it can be to only look at economic growth.
Annual Growth Rate
The annual growth rate is the yearly percentage rate of increase of real GDP. This is simply telling us the extent to which the economy grew from year to year. The annual growth rate is particularly important in calculating how long it takes a gradually growing variable to double. This is done by applying the rule of 70, and economists usually apply this to the real GDP or real GDP per capita.
The annual growth rate is the yearly percentage rate of increase of real GDP.
The rule of 70 is the formula used in calculating how long it takes a gradually growing variable to double.
The rule of 70 is presented as follows:
\(\hbox{Years to double}=\frac{\hbox{70}}{\hbox{Annual Growth Rate of the Variable}}\)
Let's look at an example now.
Country A has an annual per capita growth rate of 3.5%. How long will it take country A to double its real GDP per capita?
Using:
\(\hbox{Years to double}=\frac{\hbox{70}}{\hbox{Annual Growth Rate of the Variable}}\)
We have:
\(\hbox{Years to double}=\frac{70}{3.5}=20\)
This means it will take approximately 20 years for country A to double its real GDP per capita.
Read our article on Economic Growth to understand more about what the numbers we calculated mean.
Growth Rate - Key takeaways
- Growth rate refers to the percentage rate of increase in the level of an economic variable over a given period.
- Economic growth refers to an increase in the level of GDP over a given period.
- Economic growth rate refers to the percentage rate of increase in the level of GDP over a given period.
- The per capita growth rate is the percentage rate of increase in the real GDP per capita over a given period.
- The rule of 70 is the formula used in calculating how long it takes a gradually growing variable to double.
References
- World Bank, GDP growth (annual %) - United States, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=US
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