Calculating GDP growth

GDP growth is the measurement of the percentage change in GDP from one year to another. It is a metric used to measure the growth of a countries income over time.

The formula

\text{GDP Growth} = 100*\frac{\text{GDP current year} - \text{GDP previous year}}{\text{GDP previous year}}

Causes of GDP growth

  • Technological progress
  • Population growth
  • Positive aggregate demand shocks

Above is a non-exhaustive list of reasons why we might observe GDP growth. The main cause of GDP growth is technological progress. As countries become smarter and progress technologically, they learn to produce goods and services more efficiently and thus produce more output.

Population growth will cause economies to grow as there is more labor for production. However, population growth does not necessarily mean that living standards are increasing for each individual citizen. If the population growth is larger than the GDP growth, there will be less output per person. Therefore, GDP per capita growth is a better metric for understanding changes in living standard of the average citizen.

In the short run, positive increases to aggregate demand can cause increase in aggregate demand. Conversely, negative shocks to aggregate demand can cause GDP growth to decrease. If this happens for two quarters, it's defined as a recession. 

Example

Consider the following fictional economy.
Year GDP
2000 100
2001 200
2002 300
2003 400

 

If we wanted to calculate the GDP growth from year 2000 to 2001 we would calculate it as
100* \frac{200 - 100}{100} = 100%
In this economy, GDP growth would be 100%. We can also calculate the GDP growth from the year 2001 to 2002
100 * \frac{300 - 200}{200} = 50%
In this case the GDP growth is only 50%.  Finally, we can calculate the GDP growth over a period of two years, from 2000 to 2002 as
100*\frac{300 - 100}{100} = 200%
It is important to note that you cannot calculate the GDP growth from the year 2000 to 2002 by adding up the growth rates from 2001 to 2001 (100%) to the growth rate from 2001 to 2002 (50%), as that would total 150% instead of 200%.

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