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. Show
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 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. But it also tends to be volatile (see bars in Chart). This is because the effects of any one-time-only factors during the quarter, labour disputes for example, become compounded when the rate is annualized. 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.1 The year-over-year growth rate tends to be somewhat less volatile than quarterly growth at an annual rate (see line on Chart). That is because the effect of any special factors does not get compounded. But it is also less timely, since it looks at what happened to the economy over the entire previous year, not just the past three months. Finally, the annual average growth rate is the average of year-over-year percentage changes reported during a year. The November Monetary Policy Report indicates that the Bank expects the annual average growth rate for 2001 to be about 1.5 per cent. For the first half of 2001, the year-over-year growth rates as published by Statistics Canada are 2.5 per cent in the first quarter and 2.1 per cent in the second quarter. For the third and fourth quarters, a profile that is consistent with the expectations described in the November Report (say -0.5 per cent and 0 per cent, respectively at annual rates) yields year-over-year growth of 0.9 per cent in the third quarter and 0.5 per cent in the fourth quarter. Averaging the four year-over-year growth rates in 2001 gives the annual average growth rate of 1.5 per cent (dashed bar in Chart). * Projected growth rates incorporate "First Scenario" values. Each measure has strengths and weaknesses. But mixing up the measures can lead to results that may look confusing at first glance. The Table below provides some examples that illustrate this. In the Table, the numbers for 2001Q1 and Q2 are as reported by Statistics Canada. For the next six quarters from 2001Q3 to 2002Q4 the numbers provide two illustrative scenarios designed to make a point. The illustrative scenario in the top panel is broadly consistent with the economic outlook described in the November Report: zero to slightly negative growth in 2001H2, 2 per cent growth in 2002H1, and 4 per cent growth in 2002H2.2 The annual average growth rate for 2002 is 1.5 per cent. This sounds low, but as the quarterly growth at annual rates illustrates, to achieve this annual average requires a considerably stronger quarterly profile through 2002. The reason for this is that the annual average growth for 2002 is pulled down by the very weak growth in the second half of 2001. To illustrate this point, the lower panel of the Table puts the quarterly growth at annual rates in 2001Q3 and Q4 arbitrarily at 3 per cent, while leaving the profile for quarterly growth at annual rates for 2002 unchanged. With this change to the second half of 2001, 2002 begins from a higher starting point so, while the quarterly profile in 2002 is the same as in the upper panel, the annual average growth rate is a full percentage point higher at 2.5 per cent. The Table also illustrates another point. Note that in the upper panel the annual average growth rates for 2001 and 2002 are the same but the quarterly profiles in the two years are very different. Through 2001 growth decelerates, while in 2002 growth picks up through the year. The Bank of Canada uses average annual growth as a summary measure of broad trends. Annual averages are also useful when comparing to other forecasters. However, the Bank uses the other measures to focus on shorter-term developments.
For more information see ABS Time Series Analysis: The Basics StockA measure that describes an attribute at a specific point in time.
FlowA measure that describes activity over a period of time.
IndexA measure that typically combines a range of different measures and data sources to describe a concept using an index score (where the units are simply index points).
Indexing is also a method that can be used to compare changes over time, where two or more series had different values at the starting point.
Ways to adjust time series to reveal underlying patternsSeasonally adjustedSeasonal adjustment is a statistical technique that adjusts the original data, to remove the impact of cyclical factors (including calendar-related patterns).
TrendTrending is a statistical technique to remove volatile movement that might remain from one period to the next, to reveal the underlying trend movement of the series over time. Trending typically applies a weighted average of previous (and future) periods.
Moving annual totalThe sum total of values over all periods over a year (12 months or four quarters).
Moving annual averageThe average value over all periods in a year. Similar to a moving annual total (above), but uses an average of values over the 12 months (or 4 quarters) instead or summing the values together.
Terms used to describe change (growth) over timeThrough the year growthThe latest period (month or quarter) compared to the same period (month or quarter) in the previous year. A commonly used and well-understood way of describing growth over time. Sometimes also referred to as “growth over the year” or “year-ended growth”. Annual (year on year) growthThe sum of the most recent four quarters, compared to the sum of the previous four quarters. For monthly data, it is the sum of the most recent 12 months, divided by the sum of the previous 12 months.
Per capitaPer capita refers to the value of a variable, divided by the number of people in the population.
Percentage point growthDescribes the difference between two rates or values expressed in percentage terms.
Terms used to describe values and pricesNominalA value of price in original terms (current prices) - without any adjustment.
RealA way to describe prices or values in different periods of time (such as in the past, or in the future) that are adjusted to remove the impact of inflation (typically, using the consumer price index, or CPI)
Chain volume (real)A way of expressing value (of production or spending) in terms of the volume (quantity) of goods or services produced, to remove the impact of price changes. Another way to think about chain volume is that it describes the quantity of goods and services produced (or consumed) in an economy, in terms of a single common unit (monetary value).
Measures of production and spendingFor more information see Australian System of National Accounts: Concepts, Sources and Methods, ABS Cat No 5216.0 (detailed) Gross Domestic Product (GDP)A measure of production. Specifically, the total value of all the final goods and services produced within a country. In Australia, GDP is published both quarterly and annually.
Gross State Product (GSP)The value of all of a goods and services produced within the state (the state-level equivalent of GDP). GSP includes all final products and services during a specific time period which has been produced by the state’s inhabitants. It is the sum of all value added by industries within the state. In Australia, GSP is published annually (in November). GSP (and GDP) can be broken down into components, in three ways:
Domestic Final Demand (DFD)A measure of spending. Specifically, the sum of final consumption, investment and stock building expenditures, by both private and government sectors. State Final Demand (SFD)State Final Demand measures the total value of goods and services that are sold in a state to buyers (who wish to consume them or retain them in the form of Capital Assets). SFD is the state-level equivalent of DFD. Measures of investmentPrivate new capital expenditure (PNCE)Includes the value of expenditure on non-dwelling construction (such as buildings and structures) and purchases of new machinery and equipment.
In South Australia, PNCE typically accounts for about 40% of total business investment. New private business investmentA broader measure than PNCE. Private business investment includes PNCE (above) but also investment in intellectual property (such as expenditure on exploration, research and development, and computer software) and investment by a broader range of industries (including Agriculture, Food and Fisheries) that are not included in the PNCE survey.
Private gross fixed capital expenditureThe broadest measure of private investment. It includes private new business investment, net purchases of second-hand assets, and investment in private dwellings. Also referred to as private gross fixed capital formation. Terms used in labour force statisticsFor more information see: Note: the terms below reflect concepts used in the ABS monthly Labour Force Survey. EmploymentThe number of people in the civilian population, aged 15 and over, who did any form of work (for payment) during the reference period.
ParticipationThe number of people in the civilian population aged 15 and over who participated (worked or looked for work) during the reference period. Also referred to as the labour force.
Participation rateThe proportion of the civilian population aged 15 and over who participated during the reference period. UnemploymentThe number of people in the labour force who were not employed, but were actively looking for work, and available for work during the reference period.
Unemployment rateThe proportion of the labour force who were unemployed during the reference period. Youth unemployment rateUsed in DTF briefs to refer to the proportion of 15 to 24 year old people in the labour force who were unemployed in the reference period.
Under-employmentRefers to people in the labour force who were employed on a part-time basis in the reference period, but would have liked to work more hours (and were available to work more hours) during the reference period.
Under-utilisationThe sum of unemployment and under-employment. A relatively new measure, and considered to be a broader measure of spare capacity in the labour force, than unemployment. |