Economic Growth Rate: Definition, Formula, and Example
What Is an Economic Growth Rate?
An economic growth rate is the percentage change in the value of all of the goods and services produced in a nation during a specific period of time, as compared to an earlier period. The economic growth rate is used to measure the comparative health of an economy over time. The numbers are usually compiled and reported quarterly and annually.
In most cases, the economic growth rate measures the change in a nation’s gross domestic product (GDP). In nations with economies that are heavily dependant on foreign earnings, gross national product (GNP) may be used. The latter takes into account net income from foreign investments.
Understanding Economic Growth Rate
Economic Growth
=
GDP
2
−
GDP
1
GDP
1
where:
GDP
=
Gross domestic product of nation
begin{aligned} &text{Economic Growth} = frac { text{GDP}_2 – text{GDP}_1 }{ text{GDP}_1 } \ &textbf{where:} \ &text{GDP} = text{Gross domestic product of nation} \ end{aligned}Economic Growth=GDP1GDP2−GDP1where:GDP=Gross domestic product of nation
The formula above shows how an economic growth rate is calculated.
When it is tracked over time, the economic growth rate suggests the general direction of a nation’s economy and the magnitude of its growth (or contraction). It also may be used to project the economic growth rate for the quarter or the year ahead.
Key Takeaways
- In the U.S. and most other nations, the economic growth rate is the change in the nation’s gross domestic product.
- The economic growth rate is tracked over time as an indicator of the general direction of a nation’s economy.
- Broadly speaking, increased demand leads to increased production and a higher economic growth rate.
An increase in the economic growth rate is usually seen as a positive. If an economy shows two consecutive quarters of negative growth rates, the nation is officially in a recession. To put it baldly, if an economy shrinks by 2% from the previous year, its overall population has experienced a reduction in income of 2% in that year.
In the U.S., GDP began growing in March 2009 as it emerged from the Great Recession. From an abysmal rate of more than -4%, it climbed steadily until it peaked in 2014 at a rate of nearly 6% growth. In 2018, it was 2.9%, up from 2.2% for the previous year.
The U.S. numbers are calculated by the federal Bureau of Economic Analysis (BEA), which reports GDP on a quarterly basis and includes the economic growth rate as a headline figure.
Why Economies Expand or Contract
Economic growth can be boosted by a number of factors and events. Most commonly, increases in demand for products lead to corresponding increases in production. The net result is more income.
July 2019
The date which marked the 10th year of the U.S. economic expansion, the longest in the nation’s history.
Technological advances and new product developments can exert positive influences on economic growth. Increases in demand from foreign markets can lead to higher export sales.
In any and all of these cases, the influx of income, if big enough, causes an increase in the economic growth rate.
An economic contraction is a mirror image. Consumers pull back on spending, so demand falls and production falls with it. In the worst case scenario, the effects snowball. As production falls, jobs are lost. Demand falls further. GDP for the quarter comes in at a negative number.
Examples of Economic Growth Rates
In July 2019, the U.S. marked an economic milestone. Its economy had been experiencing growth continuously since June 2009, making it the longest economic expansion in the nation’s history.
In statistics, however, it’s all relative. In 2018, the U.S. economy grew by 2.9%. Some economists believe that this number represented a high point for some time to come. They were forecasting an expansion of 2.2% in 2019, and a further slowing in 2020.
By contrast, the economic growth rate of India fell to 5.8% In the first quarter of 2019, the lowest growth rate in five years. Given the nation’s rapid growth in recent years, there was much hand-wringing over a severe slump in industrial output and a fall-off in car sales, both factors in the lower rate.
Nonetheless, government economists have raised the projected growth for the full fiscal year that began March 31 to 7%, compared to the previous annual growth of 6.8%. The government of India plans to boost the economy with tax incentives and new investment.