How Is the Economic Growth Rate Determined?

K.C. Bruning
K.C. Bruning

The economic growth rate is determined by finding the gross domestic product (GDP) or gross national product (GNP) for two or more years, and then calculating the differences among them. This is typically done via an equation which expresses the economic growth rate as a percentage. The equation subtracts the earlier period rate from the later period rate and then divides it by the earlier period figure. An economic growth rate is not adjusted for inflation.

In many cases, economic growth rate is determined with the GDP. The GNP is typically only used if foreign trade contributes to a large part of the country’s income. If the nation is not dependent on foreign trade, then the GDP is usually sufficient. Both the GDP and GNP represent the total amount of money a nation makes for its services and goods.

An economic growth rate can reveal whether the country is on an upswing or heading for a downturn. It can be calculated for short or long-term growth. This can include quarters within a year or decades of information. In general, the longer the period covered the more effective the analysis will be.

The accuracy of the economic growth rate can be affected by inflation or deflation. It must be determined if the GDP or GNP is changing because of these factors, rather than any other kind of change in the growth of the economy. While these changes may remain somewhat similar from year to year, there can be periods of larger fluctuation. For this reason, figures are often adjusted for these factors before they are plugged into the equation.

An economic growth rate can be calculated for one or multiple countries. Rates can also be compared among other countries. It depends on if the goal is to determine the growth of the country or to find out where it stands in relation to other nations. When analyzing countries with different currencies, it is necessary to first convert all figures into one currency in order to make an accurate comparison.

The economic growth rate tends to be higher in developing countries. This does not necessarily mean that these nations are gradually filling the wealth gap. Rather, this is primarily because larger populations in developing countries set off the gains made by the higher growth rate. Nations with a higher growth rate also do not tend to sustain that rate.