Principles of Macroeconomics / Unit 3 MAC 0218 worked example, 60 to 90 seconds
Computing a Growth Rate
The idea
A growth rate is a percentage change, and there are two ways to compute one. The simple method divides the change by the starting value. The midpoint method divides the change by the average of the starting and ending values. For a single period the two answers are close. Over a long series the midpoint method is steadier, because the simple method gives a different answer depending on which end you start from. Whichever you use, growth in output means growth in real values, never nominal ones.
In practice
Worked example: real GDP rises from twenty trillion to twenty point six trillion. The change is zero point six. The simple method divides that by twenty, giving three percent. The midpoint method divides it by twenty point three, the average of the two, giving about two point nine six percent. Close over one year, but the gap compounds across a long run of years.
Where people slip
Quarterly growth is usually reported at an annual rate, which is not the quarterly figure multiplied by four. The agencies compound it, so say annualized rather than multiplying.
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