The real GDP growth rate shows the percentage change in a country’s real GDP over time, typically from one year to the next. That means it measures by how much the economic output, adjusted for inflation, increases or decreases over a year. It can be calculated using the following formula:
Real GDP Growth Rate = [(final GDP – initial GDP)/initial GDP] x 100
In the following paragraphs, we will take a closer look at each of those components and learn how to calculate real GDP growth rates step-by-step.
1) Find the Real GDP for Two Consecutive Periods
To calculate a country’s real GDP growth rate, the first thing we need to do is find the real GDP values for two consecutive periods. In exams and quizzes, these values will often be provided along with the question. If that’s not the case, you may have to calculate GDP first by using the income approach or the expenditure approach. Please also note that you may have to divide nominal GDP values by the GDP deflator to find the real GDP.
Another way to find GDP values is to collect the data from reliable government or international resources. In the US, the Bureau of Economic Analysis (BEA) provides data on regional and national GDP on a quarterly basis. In addition to that, the World Bank maintains a comprehensive free and open database where you can find (among many other things) the real GDP of most countries worldwide.
For example, let’s say we want to calculate the real GDP growth rate of the United States between 2017 and 2018. To do this, we can use the World Bank’s list of global GDP at constant 2010 USD. This list provides real GDP data because all values are reported using 2010 USD prices, which eliminates the effects of inflation. Hence, according to that list, the real GDP values we are looking for are USD 17,844 trillion for 2018, and USD 17,349 trillion for 2017.
2) Calculate the Change in GDP
Once we know the real GDP values for two consecutive periods, we need to compute the change in GDP between the two periods. That means, we have to subtract the new GDP from the old GDP (i.e., final GDP – initial GDP). The result of this subtraction will be positive if GDP increases (i.e., positive growth), and negative if it decreases (i.e., negative growth).
In the case of our example, the final GDP is USD 17,844 trillion, and the initial GDP is USD 17,349 trillion. That means the change in real GDP from 2017 to 2018 is USD 495 billion (i.e., 17,844 trillion – 17,349 trillion). Note that the value is positive because the economic output increased from 2017 to 2018.
3) Divide the Change in GDP by the Initial GDP
After calculating the change in GDP, the next step is to divide it by the initial GDP (i.e., change in GDP / initial GDP). This gives us the actual growth rate of the economic output in relation to the base year. Depending on whether the change in GDP calculated above is negative or positive, the result of this step will have the same plus/minus sign.
Going back to our example, we have computed the change in GDP as USD 495 billion (i.e., 0.495 trillion), and we know that the initial GDP is USD 17.349 trillion. Thus, the growth rate is 0.0285 (i.e., 0.495 trillion / 17,349 trillion).
4) Multiply the Result by 100 (Optional)
Finally, to convert the growth rate into a percentage, we can multiply the result by 100. This makes it easier to interpret and compare the result, which is why most institutions and news outlets report GDP growth rates this way.
The growth rate we calculated in our example (0.0285) multiplied by 100 is 2.85. Thus, we can say that from 2017 to 2018, the real GDP of the United States increased by 2.85%. Similarly, we can now calculate the real GDP growth rate for any other period.
In a Nutshell
The real GDP growth rate shows the percentage change in a country’s real GDP over time, typically from one year to the next. It can be calculated by (1) finding real GDP for two consecutive periods, (2) calculating the change in GDP between the two periods, (3) dividing the change in GDP by the initial GDP, and (4) multiplying the result by 100 to get a percentage.