Growth Rate Formula – Computing Growth Rates
Before we start analysing the components of GDP, we should first clarify certain basic concepts such as growth rates and the difference between real and nominal GDP. Letâ€™s begin with the growth rate formula.
As we mentioned earlier, the absolute GDP number, computed by aggregating C+G+I+EX-IM, has no significant meaning for anyone. It doesn’t tell us whether the economy is shrinking or expanding year-over-year (yoy), month-to-month (mtm) or quarter-over-quarter (qoq).
What we need to compute are growth rates in order to determine which cycle of growth the economy is currently in.
Â Â An example of the quarterly growth rate is calculated as shown in the figure below.
Figure: Quarterly Growth Rate Calculations
A simple way to think about the growth of a number is to take the difference between the new value and the old value to determine how much that number has grown. In order to find the percentage growth we simply divide the difference by the old value and multiply by 100.
% Growth rate = (new value â€“ old value)/old value.
% Growth rate between Q4 and Q3 = (103-104)/104 * 100 = -0.96%
Annualised growth rate = -0.96% * 4 = -3.85%
Growth rates are annualised so we can make fair comparisons. Once we compute the growth rates at different time intervals we are then able to make our analysis. For example, if the quarterly growth rate has fallen from a positive 3.88% (annualised) to a negative, such as -3.85% we can draw conclusions as to whether the bond market will rally.
Next – Real vs Nominal Growth Rates