How to Calculate the Economic Growth Rate
The economic growth rate is the percent change in real GDP: ((real GDP year 2 − real GDP year 1) ÷ real GDP year 1) × 100.
Formula
Steps
- 1Use real GDP, not nominal. Start with real GDP for both years so the growth rate reflects actual output, not inflation. Using nominal GDP would overstate growth by counting price increases.
- 2Find the change in real GDP. Subtract the earlier year's real GDP from the later year's: Real GDP year 2 − Real GDP year 1. A negative result means output shrank (a recession).
- 3Divide by the starting value. Divide that change by the earlier (year 1) real GDP, the base you are measuring growth from. This gives the change as a decimal fraction.
- 4Convert to a percentage. Multiply by 100 to express the growth rate as a percent. This is the annual economic growth rate.
Worked example
Suppose real GDP was $19.0 trillion in year 1 and $19.57 trillion in year 2. Change in real GDP = 19.57 − 19.0 = $0.57 trillion. Divide by the year 1 value: 0.57 ÷ 19.0 = 0.03. Multiply by 100: 0.03 × 100 = 3.0%. The economic growth rate is 3.0%.
Frequently asked questions
Why do you use real GDP instead of nominal GDP?
You use real GDP because it holds prices constant at a base year, so the growth rate measures actual increases in output rather than inflation. Nominal GDP rises when prices rise, so it would overstate true economic growth. AP Economics defines economic growth as the percent change in real GDP.
What does the economic growth rate tell you?
It tells you how fast an economy's total output (real GDP) expanded or shrank over a period, usually one year. A positive rate means the economy grew and living standards likely rose; a negative rate signals contraction, and two consecutive negative quarters is a common recession marker. Rates near 2 to 3 percent are typical for a healthy developed economy.
How is this different from the real GDP per capita growth rate?
This formula measures growth in total real GDP, while per capita growth divides real GDP by population first, then finds the percent change. Per capita growth is a better gauge of average living standards because it accounts for population change. If real GDP and population both grow 3 percent, total GDP grows but GDP per capita stays flat.
Can the economic growth rate be negative?
Yes. If real GDP in year 2 is lower than in year 1, the numerator is negative, so the growth rate is negative. A negative growth rate means the economy contracted, which is what happens during a recession.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime.