Economists use many different methods to measure how fast the economy is growing. The most common way to measure the economy is real gross domestic product, or real GDP. GDP is the total value of everything--goods and services--produced in our economy. The word "real" means that the total has been adjusted to remove the effects of inflation. The other way to measure economic growth is GDP per capita.
There are at least three different ways to measure growth of real GDP. It is important to know which is being used, and to understand the differences among them. The three most common ways to measure real GDP are:
- Quarterly growth at an annual rate
- The four-quarter or "year-over-year" growth rate
- The annual average growth rate
Quarterly growth at an annual rate shows the change in real GDP from one quarter to the next, compounded into an annual rate.
(This process is often called "annualizing.") For example, in the second quarter of 2001, the economy grew 0.1 per cent from the first quarter. If the economy had grown at that pace for an entire year, the annual growth would be 0.4 per cent. So the quarterly growth at an annual rate was reported at 0.4 per cent.This measure is often used by the media. It does a good job of showing recent economic developments.
The four-quarter, or "year-over-year" growth rate, compares the level of GDP in one quarter to the level of GDP in the same quarter of the previous year. For example, in the second quarter of 2001, GDP was 2.1 per cent above that in the second quarter of 2000. This measure is popular among businesses, who generally present their own quarterly earnings results on that basis to avoid seasonal variations.
The year-over-year growth...