While Gross Domestic Product (GDP) is itself a useful number calculated to reflect the value of a country’s economy it is far more insightful to assess GDP over time and see how a country’s economy is growing (or contracting) over time. A relatively high GDP is great, but if it is declining from quarter to quarter then that is a major concern for any country. This is where calculating the GDP growth rate comes in, something that is typically done on a quarterly and annual basis by many global financial organizations.
For reference typically, GDP is calculated as:
Calculating the annual GDP growth rate is fairly straightforward. Calculating the 2014 GDP annual growth rate would be done as follows:
This will provide the GDP growth rate, expressed as a percentage, for the 2014 year. This figure can then be compared to the growth rates of prior years (calculated the same way) or to that of other countries. The comparison of growth rates can be incredibly useful to see how a country itself is trending over several years (getting better or worse) or to see how in absolute terms the country’s growth compares to that of comparable economies.
Calculating a quarterly GDP growth rate is also straightforward. The quarterly GDP growth rate would be calculated as follows:
This will provide the GDP growth rate percentage for Q2 of 2014 alone. Once the figures for each quarter in 2014 have been prepared you can add them all together to arrive at the 2014 GDP growth rate.
Quarterly GDP growth rates are looked at very closely by investors and analysts when it comes to assessing the economic outlook for a country. If the GDP growth rate in the U.S. comes in different than analysts expected it is not uncommon to see a swing in the stock markets follow, indicating the significance GDP growth has on the economy.
The only issue with GDP calculations is that based on the accumulated details and time delay in getting that information it is not uncommon to wait several months for hard figures to be released. The complexity and work required to accumulate information also mean that calculating GDP personally is nearly impossible, so you will have to rely on an organization that publishes the data.
When calculating any GDP growth rates it is important that you use the same source for all of your information, both in terms of yearly data for a single country and across countries. This is due to the fact that different organizations, like the International Monetary Fund and World Bank, will provide different GDP figures. This is largely due to slight differences in how they accumulate data and calculate factors like consumption or investment for a country.