Calculating economic growth

Economic Growth Rate

The economic growth rate is the annual percentage change of real GDP. To calculate this, we use the following formula:

Real GDP growth rate = $\large \frac{Real\;GDP_{current\;year} - Real\;GDP_{previous\;year} } {Real\;GDP_{previous\;year}} \, \times 100$

The economic growth rate tells us how fast the total economy is expanding and is useful for measuring possible changes in the balance of economic power of nations.

To see the change in the standard of living, we look at the real GDP per person (per capita) growth rate. We calculate this by using the following formula:

Real GDP growth rate = $\large \frac{ \frac{Real\;GDP_{current\;year}} {Population_{current\;year} } - \frac{Real\;GDP_{previous\;year}} {Pupulation_{previous\;year}}} {\frac{Real\;GDP_{previous\;year}} {Pupulation_{previous\;year}} } \, \times 100$

Rule of 70

The Rule of 70 tells us the number of years it takes to double a value when given you are given an annual percentage growth rate of the value.

The formula for the Rule of 70 is as follows:

# of years to double = $\frac{70} {annual\;percentage\;growth\;rate}$

This can be used to see when real GDP per person (per capita) doubles.

Example: If real GDP per person is $10,000 and the growth rate of real GDP per person is 5%, then applying the rule of 70 gives us

14 years = $\frac{70}{5}$

Which means it will take 14 years for real GDP per person to double.


Economic Growth in the U.S. and the World

Economic Growth in the US

In the following graph, the line in purple is real GDP and the line in blue is potential GDP. We see a couple things that has happened in the US:

1. From 1910 – 1929 (the Great Depression), the average growth rate was about 1.8% a year
2. From 1930 – 1950, averaging the Great Depression and World War II gives a growth rate of 2.4% a year
3. After 1950, the growth rate has been around the range 2-3% a year. There has been ups and downs, but nothing too significant after the 1960s.

Economic Growth in the World

In this graph, we compare 4 countries with high real GDP per person. See that:

1. United States has the highest real GDP per person
2. Japan had a high economic growth until 1990s, but stopped afterwards
3. Canada, Europe, and United States have a constant economic growth