Economic Growth Rate: Definition, Formula, and Example (2024)

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.

Understanding Economic Growth Rate

An economic growth rate is a measure of how well an economy is performing in terms of its overall size and productivity over a specific period, often a year or a quarter. It indicates the percentage change in the total economic output of a country during that time frame. This measurement reflects the economy's ability to produce goods and services, create jobs, and generate income for its citizens.

A positive economic growth rate signifies that the economy has expanded during the measured period. This often means the country had increased economic activity and output. This growth often leads to higher employment rates, improved living standards, and greater opportunities for businesses and individuals. Conversely, a negative economic growth rate suggests economic contraction which can lead to job losses, reduced income, and overall economic hardship.

Economic growth is a fundamental goal for most countries as it allows them to improve the well-being of their citizens and invest in various areas such as education, healthcare, and infrastructure. It is also closely monitored by policymakers, businesses, and investors to make informed decisions.

Measuring Economic Growth Rate

There's three popular ways of measure economic growth. First, gross domestic product (GDP) is the most common and widely used measure of economic growth. It represents the total value of all goods and services produced within a country's borders over a specific period, typically a year or a quarter.

Second, gross national product (GNP) measures the total economic output produced by a country's residents, both within the country and abroad. It includes income earned by a country's citizens and businesses from foreign investments and activities. GNP provides a broader perspective on an economy's performance, taking into account its international interactions.

Last, net domestic product (NDP) adjusts GDP for depreciation, reflecting the wear and tear on a country's capital assets. For example, consider how a country's infrastructure or major machinery wear down over time. This adjustment provides a more accurate picture of sustainable economic growth because it accounts for the need to replace or repair these assets.

It's also worth pointing out that the measurements above can also be adjusted for inflation. Real economic measurements are exclusive of inflated prices over time, while nominal terms are based on current, inflated prices.

Calculating Economic Growth Rate

This formula shows how an economic growth rate is calculated. Note that for this example, we'll look at GDP though the formula can be used for other types of measurements mentioned above.

$\begin{aligned} &\text{Economic Growth} = \frac { \text{GDP}_2 - \text{GDP}_1 }{ \text{GDP}_1 } \\ &\textbf{where:} \\ &\text{GDP} = \text{Gross domestic product of nation} \\ \end{aligned}$​EconomicGrowth=GDP1​GDP2​−GDP1​​where:GDP=Grossdomesticproductofnation​

In the formula above, the numerator calculated the difference in GDP between two periods. Most often, this will be the changed in GDP in a given month, quarter, or year. Then, this difference is divided by the newest GDP calculation. Note that it is entirely possible to calculate negative economic growth. This will occur should a nation's GDP decreases from one period to the next.

Factors That Contribute to Economic Growth

There are a considerable number of factors that determine the economic growth of a nation. Below are some of the most important factors, though the list is not meant to be exhaustive.

Investment

Investment is a cornerstone of economic growth. It includes both physical capital investment such as machinery, factories, and infrastructure and human capital investment through education and training. Physical capital investment enhances productivity, while human capital investment equips the workforce with skills

Economies with higher levels of investment typically experience higher growth rates due to increased capacity and efficiency. This is due to the expansion of activity within a country and limits of the knowledge obtained by its citizens.

Technology

Technological advancements are a powerful driver of economic growth. Innovation and technological progress lead to improved production processes, the development of new products and services, and increased overall productivity. Innovations like the internet, automation, and breakthroughs in healthcare have all had profound impacts on economic growth by enhancing efficiency and creating new industries and job opportunities.

Labor Force

As touched on under 'Investment', a skilled and growing labor force is essential for economic growth. A larger workforce can contribute to increased production capacity, while a skilled workforce enhances productivity and innovation. Investments in education and vocational training play a critical role in developing a capable labor force that can adapt to evolving industries and technologies (as discussed under the 'Innovation' section).

Economic Policy

Effective economic policies are crucial for maintaining economic stability and stimulating growth. This includes fiscal policies that ensure responsible management of government finances, monetary policies that maintain low and stable inflation, and regulatory efficiency that reduces barriers to business activity. Stable and predictable policy environments instill confidence in investors and businesses, encouraging long-term investments and economic expansion.

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. The U.S. GDP continued to grow until Q4 2019.

Then, as a result of the COVID-19 pandemic, the U.S. GDP dropped. The U.S. experienced a negative growth rate of -0.7% in Q1 2020 and -8.8% in Q2 2020. Between then and Q2 2023, the U.S. once again experienced positive economic growth rate.

In statistics, growth rates can be relative and may not fully tell the entire story. 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. In this context, not only did the economic growth rate signal actual growth, it indicates the extent in which it grew compared to analyst expectation.

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.

The Bottom Line

Economic growth rate measures the percentage change in a country's economy (often in GDP) over a specific period. It indicates whether an economy is expanding or contracting, serving as a critical indicator of its performance. Factors like investment, technological progress, a skilled labor force, entrepreneurship, and sound economic policies influence economic growth rates.