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What Is Economic Growth Rate?
The Economic Growth Rate is a metric that quantifies the change in an economy’s Gross Domestic Product (GDP) from one year to another. The change in GDP depends on the value of the goods and services a country produces in a given period. The primary purpose of this measurement is to compute the speed at which a nation has grown or is likely to grow.
The economic growth rate is usually measured in terms of the Gross Domestic Product (GDP). It varies from country to country, depending on factors such as population, industrialization, education levels, international trade relations, inflation, labor situations, etc. Also, economic cycles and phases affect the growth rate. It is interesting to note that economists calculate the world economic growth rate to understand the global economic scenario.
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- The Economic Growth Rate refers to the rate of change seen in the current year's Gross Domestic Product (GDP) compared to the previous year.
- It also measures the rate at which a country produces goods and services within the economy. This growth rate can be positive or negative.
- A positive value is typically indicated by a clear graph that moves upwards. However, a negative value shows an ongoing or looming recession.
- The economic growth rate differs from country to country since several factors, such as labor, inflation, population, etc., determine or affect it. It also depends on economic phases.
Economic Growth Rate Explained
The economic growth rate measures the total value of products and services produced across a period. It is expressed as a rate or percentage. There is a defined formula to calculate the economic growth rate. It measures and compares the GDP of the previous year with the current year to determine growth. This growth rate provides insight into the vitality and health of an economy.
A positive growth rate indicates expansion, where the country registers a high GDP growth. A negative growth rate results in slow overall growth within a nation. High economic growth levels may be observed in developed countries. Recessions typically have adverse effects on a country’s economic growth.
Various factors affect a country’s economic growth. Hence, these factors must be considered while determining the economic growth rate by country. Some major determinants include investment, consumer spending, government policies, technology, and factors of production. In addition, macroeconomic and institutional factors also influence it.
Capital infusions are one of the prime reasons for this growth. A country grows as foreign investors inject capital into developing nations. It allows investors to earn profits from growth opportunities in developing nations. Moreover, it motivates people in a country to produce more goods and services. Technological innovation also has a positive impact on the economy. Consequently, the world economic growth rate also rises.
The world economic growth rate helps determine the economic status of different countries on a global level. In 2018, it increased by 3%. If we consider the growth rate by country, a report by the Conference Board on the US economic growth rate indicates an impending recession.
Formula
Let us look at the formula to calculate the economic growth rate of a nation.
where,
GDP2 refers to the gross domestic product of the current year.
GDP1 is the gross domestic product of the previous year.
The economic growth rate can be negative or positive. A negative number is usually visible in recessionary periods when the production of goods and services is likely affected. A positive rate indicates accelerated growth.
Examples
Let us look at the examples of economic growth rates to understand the concept further.
Example #1
Suppose the GDP of the United States in 2021 was $70,248 trillion. In 2022, the GDP was $25,464 trillion. Let us calculate the US economic growth rate for 2022:
Economic Growth Rate = GDP (2022) - GDP (2021)/GDP (2021) * 100
= /70,248 * 100
= /$70,248 * 100
= - 62.33%
Example #2
According to a World Bank report, the economic growth rate of the Gulf Cooperation Council will grow at a slower rate in 2023. The report attributes this slow growth primarily to a decline in oil & gas revenue and generally lamentable global economic conditions. The expected growth rate for the GCC is 2.5% in 2023, and a rate of 3.2% has been projected for 2024.
Economic Growth Rate vs GDP Growth Rate
Although the economic growth rate considers the GDP growth rate, they have varied characteristics. Let us look at the differences between these concepts.
| Basis | Economic Growth Rate | GDP Growth Rate |
|---|---|---|
| Meaning | It refers to the rate at which a country’s GDP changes, depending on the quantum of goods and services produced and used in it. | Gross Domestic Product (GDP) growth rate is the total goods and services produced in an economy. |
| Purpose | The aim is to measure the change seen in GDP annually. | The purpose is to act as an indicator to determine the health of an economy. |
| Formula | Growth Rate = (GDP2 - GDP1) / GDP1 * 100 | GDP = C + I + G + (X-M)where, C is consumer spending, I refers to business investment, G is government spending, and X-M is the net exports. |
| Expressed as | The growth rate is measured as a percentage. | It is expressed in monetary terms (for example, dollars). |
Frequently Asked Questions (FAQs)
The economic growth rate plays an important role in determining a country’s economic status on a global level. For example, a country with higher GDP will have a higher standard of living. Individuals residing in this nation will likely have higher incomes and might be spending more on products and services. If they do so, the growth rate will automatically accelerate.
Savings rates in an economy affect the growth rate. Nations with higher savings rates tend to have a higher output level. For example, if the savings rate is high, investors will invest more in products and services. Thus, production will also increase.
According to a report by FocusEconomics, Guyana is the fastest-growing country in the 2022 to 2026 window, with a growth rate of 25.8%.
Yes. Several factors can result in the economic growth rate becoming negative. Some of these are decreasing income levels, rising unemployment, poverty, and capital withdrawal.
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