Growth Rate

9 Key excerpts on "Growth Rate"

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  eBook - ePub

  UFS BUSINESS SCHOOL EDITION ECONOMIC INDICATORS

  • P Mohr, D Yu, S Adendorff(Authors)
  • 2020(Publication Date)
  • Van Schaik Publishers

    (Publisher)

  45

  3

  Economic growth

  Economists, business people and other observers are usually interested in the growth in total production or income rather than in the level of these variables. In other words, they are interested primarily in the rate of economic growth. However, the measurement of economic growth is no easy task. As one economist once put it, it is subject to the deficiencies of data (the shortcomings of GDP etc), the vagaries of valuation (the difficulties experienced in valuing various items), the aberrations of averages (the fact that a single average Growth Rate often conceals important underlying trends and structural changes) and the treacheries of timing (eg the impact of the business cycle (see Chapter 4 )).

  The growth performance of the economy is usually measured in terms of the growth in real gross domestic product (real GDP) or real GDP per capita. Nominal (or current-price) GDP cannot be used, since changes in nominal GDP reflect changes in prices (ie inflation) as well as changes in the volume of economic activity. Nominal GDP therefore has to be adjusted to obtain real GDP (or GDP at constant prices) before economic growth can be measured. In principle, real GDP should also be expressed on a per capita basis by dividing it by the size of the population. In practice, however, economic growth is usually measured as the rate of change in real GDP rather than the rate of change in real GDP per capita. Other possible measures of economic growth will also be discussed in this chapter. First, the calculation of Growth Rates (or rates of change) requires some attention.

  3.1 CALCULATING ANNUAL RATES OF CHANGE

  Since economic growth is usually expressed as an annual rate, the calculation of annual rates (or the annualisation of rates) over different periods is explained in this 46

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  Economics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Understanding why and how economic growth happens is a very important part of macroeconomics. Although much of macroeconomics is aimed at understanding business cycles— recurring periods of prosperity and recession—the fact is that, over the long run, most economies do grow wealthier. The long-run trend of real GDP in the United States and most other countries is positive. Yet the rate at which real GDP grows is very different across countries. Why? What factors cause economies to grow and living standards to rise? In this chapter we focus on the long-term picture. We begin by defining economic growth and discussing its importance. Then we examine the determinants of economic growth to understand what accounts for the different rates of growth across countries. 16-1 Defining Economic Growth What do we mean by economic growth? Economists use two measures of growth—real GDP and per capita real GDP—to compare how economies grow over time. 16-1a Real GDP Basically, economic growth is an increase in real GDP. As more goods and services are pro-duced, the real GDP increases and people are able to consume more. To calculate the percentage change in real GDP over a year, we simply divide the change in GDP by the value of GDP at the beginning of the year, and then multiply the quo-tient by 100. For instance, the real GDP of Singapore was approximately 57,450 million Sin-gapore dollars in 2012 and approximately 58,191 million in 2013. This was after the global recession, and the economy grew at a rate of 1.2 percent over that year: Percentage change in real GDP ¼ (change over year = beginning value) 100 ¼ [(58,191 57,450) = 57,450] 100 ¼ 12 : 5 % 16-1a-1 Compound Growth From 2000 to 2007 (prior to the start of the global recession in 2008), the industrial countries of the world showed an average annual Growth Rate of real GDP of 2.5 percent. Over the same period, the average annual Growth Rate of real GDP for developing countries was 6.5 percent.

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  Development Economics

  Theory, Empirical Research, and Policy Analysis

  • Julie Schaffner(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Measures of per capita income are answers to the question: If we could redistribute all income until we achieve equality, without incurring any costs or losing any of the income in the process, what level of income would be enjoyed by everyone? Increases in per capita income thus indicate expansion of the level of material prosperity that everyone would share if income were distributed evenly. Growth figures are usually reported as annual Growth Rates. This means that even when the period of interest is greater or less than one year, the average Growth Rate for that period is expressed as the growth that would occur over one full year at the observed pace. Growth Rates are often expressed as annually compounded average rates. This means that the averages are calculated in a way that treats growth as a multiplicative process, in which growth in any one year increases the size of the base to which subsequent Growth Rates are applied. For example, the following table describes the evolution of GDP in an economy that starts with GDP of 100 and grows at a steady annually compounded rate of 3 percent for 10 years. We can see compounding in the calculation of Year 2 GDP, where the growth expe- rienced from Year 1 to Year 2 (embodied in the final 1.03 factor) was applied not to the original 100 but to 100 × 1.03, which was the new level of GDP attained in Year 1, as a result of growth from Year 0 to Year 1. Year GDP Year 0 100 Year 1 100 × 1.03 103 Year 2 100 × 1.03 × 1.03 106.09 . . . . . . Year 10 100 × 1.03 10 134.39 36 Economic Growth The average annually compounded Growth Rate over a 10-year period for a country that had GDP of G0 in Year 0 and G10 in Year 10 is the Growth Rate r (expressed, e.g., as r = 0.03 for a 3-percent Growth Rate) that solves the equation G0 1 + r 10 = G10.

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  Statistical Handbook on Poverty in the Developing World

  • Chandrika Kaul, Valerie Tomaselli-Moschovitis, Chandrika Kaul, Valerie Tomaselli-Moschovitis(Authors)
  • 1999(Publication Date)
  • Greenwood

    (Publisher)

  It shows the economic capacity of a country. It is a complex indicator, determined by various factors in- cluding the physical wealth (land, minerals, forests, etc.), human resources (employees, employers, and their skill levels), and capital development (internal infrastructure, production-related machinery, etc.). Given the factors that go into the GDP, it is easy to see why many poor coun- tries tally low GDP statistics: with limited and/or under- performing physical, human, and capital resources, a capacity for healthy economic development will be lim- ited as well. GDP Growth Rates help to measure the progress of economic development over time. Growth in GDP for all countries in the designated income categories shows that, on the whole, economic capacity is on the rise. Clearly, as summary totals, the Growth Rates only aver- age out the change in GDP; therefore, the upward trends can mask the economic performance of individual coun- tries (Cl.l). The sectoral breakdown on GDP is a measure of the components of a country or group of countries' economic output. Least-developed countries often have a higher share of their GDP rooted in agriculture than higher- income or more-developed countries do. Analyzing the sectoral breakdown helps analysts to understand, in raw terms, what drives economic activity and growth (Cl .2). Gross Domestic Product per Capita: GDP per Capita is the GDP of a country divided by its popula- tion; it helps to relate a country's economic output to the size of its population and therefore acts as an important qualifier to the cruder GDP measurement. Consequently, it is a more valuable tool in analyzing the economic well- being of a country: it can tell us whether a country's output is in proportion to its population (C2.1-C2.6). Consumer Price Index (CPI): CPI represents the volatility of prices experienced by the population within a country.

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  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  For example, an economy growing at a 1% annual rate over 50 years will see its GDP per capita rise by a total of 64%, from 100 to 164 in this example. However, a country growing at a 5% annual rate will see (almost) the same amount of growth—from 100 to 163—over just 10 years. Rapid rates of economic growth can bring profound transformation. (See the following Clear It Up feature on the relationship between compound Growth Rates and compound interest rates.) If the rate of growth is 8%, young adults starting at age 20 will see the average standard of living in their country more than double by the time they reach age 30, and grow more than sixfold by the time they reach age 45. Growth Rate Value of an original 100 in 10 Years Value of an original 100 in 25 Years Value of an original 100 in 50 Years 1% 110 128 164 3% 134 209 438 5% 163 339 1,147 8% 216 685 4,690 TABLE 20.3 Growth of GDP over Different Time Horizons How are compound Growth Rates and compound interest rates related? The formula for GDP Growth Rates over different periods of time, as Figure 20.3 shows, is exactly the same as the formula for how a given amount of financial savings grows at a certain interest rate over time, as presented in Choice in a World of Scarcity. Both formulas have the same ingredients: • an original starting amount, in one case GDP and in the other case an amount of financial saving; • a percentage increase over time, in one case the GDP Growth Rate and in the other case an interest rate; • and an amount of time over which this effect happens. Recall that compound interest is interest that is earned on past interest. It causes the total amount of financial savings to grow dramatically over time. Similarly, compound rates of economic growth, or the compound Growth Rate, means that we multiply the rate of growth by a base that includes past GDP growth, with dramatic effects over time.

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  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  2 Economic Growth

  A nation is not made wealthy by the childish accumulation of shiny metals, but is enriched by the economic prosperity of its people.

  Adam Smith1

  Economic growth is the litmus test of modern national and global success. Lack of growth can topple governments, bankrupt states, jeopardise currencies, cause wars and create long-term structural and societal problems that create hardship for millions. Understanding how growth occurs, what jeopardises it, but, perhaps more importantly, how to sustain it, has become the Holy Grail of politicians. The universal, standard measure of a country's economic growth is its gross domestic product (GDP). It is vital to understand what components make up this measure and how they impact on wider society, to be able to analyse and understand their impact on financial markets.

  ECONOMIC GROWTH THROUGH THE AGES

  Figure 2.1 shows the world economy from 1 to 2008. The author estimates data for year 1 and then for year 1000, then 500 years later, and, after that, at 100-year intervals until 1800 when it becomes annual. Prior to 1500, figures are based on population trends, as there was very little productivity difference. This is not to say there was no divergence – there was – as better agricultural techniques, better access to land and water and so forth started to make a difference in some parts of the world, from around 1000.

  Figure 2.1

  The world until 2000.2

  Source: Angus Maddison.

  However, the real game changer was the Industrial Revolution, which altered everything, starting in Europe, but then quickly spreading around the world. And this process has not yet ended, as there is still catch-up occurring in some countries. There is still potential for big changes in GDP per head (per capita), as even a cursory glance at the chart will show. Japan and China have made remarkable progress in a short time, and Japan and the US are now ahead of those that started off the process in the first place.

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  Principles of Economics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  Laws must be clear, public, fair, and enforced, and applicable to all members of society area of a country, usually with access to a port where, among other benefits, the government does not tax trade a combination of invention—advances in knowledge—and innovation all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products KEY CONCEPTS AND SUMMARY 20.1 The Relatively Recent Arrival of Economic Growth Since the early nineteenth century, there has been a spectacular process of long-run economic growth during which the world’s leading economies—mostly those in Western Europe and North America—expanded GDP per capita at an average rate of about 2% per year. In the last half-century, countries like Japan, South Korea, and China have shown the potential to catch up. The Industrial Revolution facilitated the extensive process of economic growth, that economists often refer to as modern economic growth. This increased worker productivity and trade, as well as the 494 Chapter 20 | Economic Growth This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 development of governance and market institutions. 20.2 Labor Productivity and Economic Growth We can measure productivity, the value of what is produced per worker, or per hour worked, as the level of GDP per worker or GDP per hour. The United States experienced a productivity slowdown between 1973 and 1989. Since then, U.S. productivity has rebounded for the most part, but annual growth in productivity in the nonfarm business sector has been less than one percent each year between 2011 and 2016. It is not clear what productivity growth will be in the coming years. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages.

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  The Trader's Guide to Key Economic Indicators

  With New Chapters on Commodities and Fixed-Income Indicators

  • Richard Yamarone(Author)
  • 2010(Publication Date)
  • Bloomberg Press

    (Publisher)

  This section of the chapter has described the multitude of figures included in the GDP report, how they are related to one another, and how they are derived. Next comes the nuts and bolts: how economists and traders use the report numbers in analyzing both big-picture issues, such as the future course of the business cycle, and smaller issues, such as when to put their money where.

  WHAT DOES IT ALL MEAN?

  The GDP report contains a wealth of information about the nation’s economy. Each of its components tells a different story about a particular group, sector, industry, or activity. Not surprisingly, then, different market participants look at different sections and draw different inferences. Retail analysts, for instance, focus mostly on consumer spending. Those covering housing, construction, or real estate investment trusts (REITs) concentrate on the residential activity in investment spending. Defense-industry analysts focus on the national defense spending component of government consumption expenditures and gross investment. Fixed-income analysts and investors, ever wary of the eroding effects of inflation, concern themselves with the GDP deflators and GDP Growth Rate. Traders, who are always on the lookout for possible market movers, watch for numbers that contradict expectations, which they track carefully, often jotting them down in notebooks kept at their desks, for quick reference when the real figures are announced.

  GDP GROWTH

  The annualized quarterly Growth Rate of real GDP is the headline number of the GDP report. As with most economic figures, strong positive postings are generally good news for the economy, corporate profits, and stock valuations. Not so for bonds, however. Inflation erodes the value of fixed-income securities, and more torrid economic growth is usually associated with higher rates of inflation.

  Market reactions—both positive and negative—are more pronounced when the announced numbers differ from the expected ones. The larger the difference, the greater the market move. Say the Street consensus for the third quarter was for an annualized GDP Growth Rate of 4.2 percent. On the one hand, a weak posting of between 1 and 2 percent would probably spark a sell-off in the stock market and boost the price of fixed-income securities, lowering yields. Stronger-than-expected growth of 5.5 to 6.5 percent, on the other hand, would be well received by equity traders and frowned upon by fixed-income dealers.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  It is not clear what productivity growth will be in the coming years. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita. 186 7 • Key Terms Access for free at openstax.org Compound interest and compound Growth Rates behave in the same way as productivity rates. Seemingly small changes in percentage points can have big impacts on income over time. 7.3 Components of Economic Growth Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. Capital deepening refers to an increase in the amount of capital per worker, either human capital per worker, in the form of higher education or skills, or physical capital per worker. Technology, in its economic meaning, refers broadly to all new methods of production, which includes major scientific inventions but also small inventions and even better forms of management or other types of institutions. A healthy climate for growth in GDP per capita consists of improvements in human capital, physical capital, and technology, in a market-oriented environment with supportive public policies and institutions. 7.4 Economic Convergence When countries with lower GDP levels per capita catch up to countries with higher GDP levels per capita, we call the process convergence. Convergence can occur even when both high- and low-income countries increase investment in physical and human capital with the objective of growing GDP.

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