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 term since it is the most supportive way to make a comparison over time and space.
Also, 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, as even a change in consumption tax rates, for example VAT or sales tax, can cause shift in prices.
Furthermore, 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 the population.
To make things more palpable, let's have a real-world example for GDP growth rate calculator in the US economy.
The real GDP in the United States in 2017 was 17,304,984 Million US dollars and in 2016 was 16,920,328 Million US dollars.
Applying the GDP growth rate formula, which is
GDP growth = (GDP in current period - GDP in the previous period) / GDP in the previous period * 100, the following calculation has to be made:
GDP growth = (17,304,984 -16,920,328) / 16,920,328 * 100 = 2.27%
Therefore, the real GDP growth in the United States in 2017 compared to the previous year was 2.27%, which is, by the way, a decent figure for a developed country in a worldwide comparison.
Importance in economics
The GDP growth rate formula is an important supplementary indicator of the gross domestic product since it provides essential information about the development and progress of a given economy.
In other words, measuring economic growth rate provides essential information to the government and policymakers as it shows the dynamic feature of economic performance.
Dynamic of economic growth gains particular relevance in the long run. To demonstrate this, it might be a good idea if you check the rule of 72 and apply it to the puzzle of long-term economic growth.
Let's consider a country with a real GDP per capita around the half of the US GDP per capita, as for example Poland. You can see, if the real GDP per capita grows at 1 percent per year, it will take near 70 years to double. However, if it grows at 2 percent per year, it will take only 35 years to reach the US level. It is a huge difference, isn't it?
The US economy experienced the fastest economic growth in the 19th century, on average by about 4.5% per year. 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, and that is why by the year 2000 the US was the second wealthiest country in the world. Luxembourg was the wealthiest, on a per capita basis (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 a British economist, Colin Clark at the beginning of the 20th century (Lepenies, 2016).