Formula for GDP Growth Rate

What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is a monetary value used to track a county's economic health. It represents the total market value of all the finished goods and services produced within a country over a specific time. There are several factors that can contribute to a country's gross domestic product. Usually, these include consumption, investments, government spending, exports, and imports.

Usually, GDP calculations are available on an annual basis. Among the various factors that it considers, exports and imports play a significant role in determining a nation's GDP. Usually, if a country's exports exceed its imports, its GDP will increase. This position is known as a trade surplus. Similarly, GDP may also include the effects of inflation on an economy, known as real GDP.

What is Gross Domestic Product (GDP) Growth Rate?

The gross domestic growth rate is a metric that measures how fast a county's GDP or economy is growing. It compares a country's most recent GDP with its previous GDP. These GDPs can either be on a quarterly or annual basis. It represents the percentage of change in the value of all goods or services produced in a nation during a specific time in relation to a previous period.

A country's GDP growth rate specifies how much its GDP has increased or decreased over a period. There are several factors that may contribute to whether the rate will grow or decline. These include all the factors listed above that influence a country's GDP. Similarly, a nation's government policies also play a role in affecting its GDP growth rate.

While most countries prefer GDP growth, a significant increase in GDP can also be problematic. This growth can lead to increases in inflation, which can cause interest rate increases as well. In contrast, a decreasing GDP is always adverse for countries. Nations that undergo a continuously decreasing GDP may enter into a recession.

What is the formula for GDP Growth Rate?

The formula for GDP growth rate requires users to obtain a nation’s current GDP and its GDP for the previous period. Once they do so, they can calculate the GDP growth rate using the following formula.

GDP Growth Rate = (Current GDP - Previous GDP) / Previous GDP

The above formula may return a positive or negative ratio that specifies whether a country’s GDP has grown or fallen. Usually, users use a country’s nominal GDP to calculate the GDP growth rate for it. However, they also have the option to use real GDP for this purpose. Users can also calculate a nation's annual GDP growth or quarterly growth using the formula. However, the quarterly growth calculation is more common.

Example

USA's nominal GDP in the year 2019 was $21,439 billion. The country's GDP in 2018 was $20,580.2 billion. Therefore, the USA's GDP growth rate from 2018 to 2019 will be as follows.

GDP Growth Rate = (Current GDP - Previous GDP) / Previous GDP

GDP Growth Rate = ($21,439 - $20,580.2) / $20,580.2

GDP Growth Rate = 4.17%

Conclusion

Gross Domestic Product (GDP) is a term used to describe the total market value of all finished goods and services produced in a country over a specific time. GDP calculation includes several factors, including a country’s consumption, investments, government spending, exports, and imports. GDP growth rate is a metric that measures the growth or decline rate of a country's GDP.

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