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.
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. 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.
| FIRST SCENARIO | ||||||||
| 2001 (illustrative after Q2) | 2002 (illustrative) | |||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| Quarterly growth at an annual rate: | 2.0 | 0.4 | -0.5 | 0.0 | 1.0 | 3.0 | 4.0 | 4.0 |
| Four-quarter or year-over-year growth: | 2.5 | 2.1 | 0.9 | 0.5 | 0.2 | 0.9 | 2.0 | 3.0 |
| Average annual growth rate: | 1.5 | 1.5 | ||||||
| SECOND SCENARIO | ||||||||
| 2001 (illustrative after Q2) | 2002 (illustrative) | |||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| Quarterly growth at annual rate: | 2.0 | 0.4 | 3.0 | 3.0 | 1.0 | 3.0 | 4.0 | 4.0 |
| Four-quarter or year-over-year growth: | 2.5 | 2.1 | 1.8 | 2.1 | 1.9 | 2.5 | 2.7 | 3.0 |
| Average annual growth rate: | 2.1 | 2.5 |
For more information see ABS Time Series Analysis: The Basics
Stock
A measure that describes an attribute at a specific point in time.
| Example: | The number of people in the population. |
Flow
A measure that describes activity over a period of time.
| Example: | The number of births or deaths during the quarter, or during the year. |
Index
A 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).
| Examples: |
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| Note: | An index is a useful way to understand change over time, or to compare different regions or countries, at a common point in time. An advantage of an index is that it makes comparison simple. But sometimes, it’s useful to look at the change in the underlying data (components), in order to understand what is driving change in the index (even when the index is not changing, its components might be moving in different directions). |
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.
| Example: | To see how the number of dwelling approvals over the last five years has changed in South Australia compared to New South Wales, the value in both states five years ago could be indexed to a common starting point (say, an index score of 100). |
Ways to adjust time series to reveal underlying patterns
Seasonally adjusted
Seasonal adjustment is a statistical technique that adjusts the original data, to remove the impact of cyclical factors (including calendar-related patterns).
| Example: | Retail spending tends to be higher in the December Christmas trading period. Monthly figures are also affected by the number of weekends in the month, and the timing of Easter. |
| Note: | Seasonal adjustment removes the impact of cyclical factors, but does not adjust for volatile movement from one period to the next. Volatile movements can occur for a range of reasons, including sampling error (in the case of survey data). They are sometimes referred to as “statistical noise”. |
Trend
Trending 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.
| Example: | In the monthly labour force survey data, the ABS applies a 13-month centred moving average (which includes 6 months before, and 6 months after, the reference month). |
| Note: | At the time of publication for a given month (such as January), movement of the series in future months is not known – only the previous months. When new data is published in subsequent months, this may cause a revision in the trend figure for January, compared to what was originally published. The ABS generally applies trending to data that has already been seasonally adjusted, but sometimes it can be applied to data in original terms. |
Moving annual total
The sum total of values over all periods over a year (12 months or four quarters).
| Example: | The value of merchandise exports is published monthly (in original terms only), but commonly reported as a total of the previous 12 months. The moving annual total can be updated every month when new data is published. |
| Note: | For data that typically reflect seasonal calendar-related impacts (but is not published in seasonally adjusted terms), reporting a moving annual average of the original data is a more reliable way to illustrate the underlying annual change. |
Moving annual average
The 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.
| Example: | For example: the moving average annual level of youth unemployment (published monthly in original terms), or employment by industry (published every 3 months, in original terms). |
| Note: | Similar to trending, using a moving annual average is a way to reduce volatile movement from one period to the next. Particularly where that volatility reflects larger survey sampling error (for example, when survey data is broken down by age group, by industry, or by region), using a moving annual average gives a more reliable picture of the underlying movement. |
Terms used to describe change (growth) over time
Through the year growth
The 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) growth
The 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.
| Example: | For example: State Budget forecasts for state final demand and employment growth use annual (rather than through the year) growth, because doing so gives a more useful picture of things that are important in a Budget context (such as annual payroll tax revenue, etc). |
| Note: | Where growth has not occurred at an even rate throughout the year – or where the value in the latest period (or corresponding period a year earlier) was abnormally high or abnormally low – use of annual (rather than through the year) will reduce the impact of that abnormal month or quarter. |
Per capita
Per capita refers to the value of a variable, divided by the number of people in the population.
| Example: | For example: GDP per capita is a commonly used benchmark to compare the level of economic development in different countries. |
| Note: | Growth in per capita terms is a useful way to compare growth in regions or countries where the populations have grown at different rates. If a variable grows at a slower rate than population, then per capita growth would be negative. |
Percentage point growth
Describes the difference between two rates or values expressed in percentage terms.
| Example: | The difference between 25.0% and 26.5% is 1.5 percentage points (p.p.), not 1.5 per cent. |
Terms used to describe values and prices
Nominal
A value of price in original terms (current prices) - without any adjustment.
| Example: | The nominal price of a postage stamp in Australia in 1968 was 5 cents. |
Real
A 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)
| Example: | The real price of a postage stamp in Australia in 1968 was 62 cents (in real 2018 dollars). |
| Tip: | The Reserve Bank website has a handy inflation calculator to convert nominal prices to real prices. |
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).
| Example: | Gross domestic product, gross state product and state final demand are most commonly reported in chain volume terms. |
| Notes: | Chain volume figures are (by definition) ‘real’ – and chain volume growth is ‘real’ growth – because the impact of price changes is removed. In an economy that produces different types of goods or services – and the quantities and values of these all change at different rates, from one period to the next – using chain volume growth describes the change in quantities (as though the prices of each of those goods and services had remained constant). At the economy-wide level, chain volume is a more sophisticated way to remove the impact of price changes than CPI inflation (because CPI is based on a typical basket of goods consumed by an individual or household). For further information, see the ABS feature article: Demystifying Chain Volume Measures. |
Measures of production and spending
For 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.
| Note: | GDP does not include the value of goods and services produced by Australian-owned business operating in other countries (which would be Gross National Product). |
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:
| Production method: GSP(P) | The sum of all Gross Value Added by industries within the state. Gross Value Added is the difference between the value of output (sales) and the value of intermediate consumption (input costs such as goods, services, energy etc).
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| Expenditure method: GSP(E) | Expenditure on consumption and investment (by households, businesses and government) plus changes in inventories and net exports (in the case of GSP, this includes both interstate and overseas exports of goods and services, less imports from interstate and overseas).
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| Income method: GSP(I) | A breakdown of GSP by the components of income – including income to employees (wages) and income to business (profits).
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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 investment
Private 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.
| Note: | Private new capital expenditure excludes the following sectors:
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In South Australia, PNCE typically accounts for about 40% of total business investment.
New private business investment
A 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.
| Example: | For example: the Royal Adelaide Hospital, financed using a public-private partnership, transferred to government ownership in 2016-17. This is reflected in the state accounts for that year as a negative net purchase of second-hand assets, due to the sale of a second-hand asset (a hospital which had already been built) from the private to the public sector. |
| Note: | New private business investment is equal to total private business investment, less net purchases of second-hand assets. New private business investment is considered to be a more useful indicator of investment related to economic activity, because transfer of second-hand assets may simply reflect the accounting treatment of a transaction where the investment related to economic activity, has already been recorded in previous years. |
Private gross fixed capital expenditure
The 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 statistics
For more information see:
Note: the terms below reflect concepts used in the ABS monthly Labour Force Survey.
Employment
The number of people in the civilian population, aged 15 and over, who did any form of work (for payment) during the reference period.
| Note: | Includes people who worked as employees, and owners of incorporated or unincorporated enterprises (such as contractors) – whether or not they were actually paid during that period. Includes people who worked on a full-time basis (35 hours per week or more) and a part-time basis (less than 35 hours per week).Does not include people employed in the armed forces (for consistency with international conventions). |
Participation
The 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.
| Note: | Includes people who were employed, and people who were unemployed but looking for work. Includes people aged over 65, if they are working or looking for work. Includes secondary and tertiary students, if they are also working or looking for work. Does not include people who are not in the labour force (including for example, if they are retired). |
Participation rate
The proportion of the civilian population aged 15 and over who participated during the reference period.
Unemployment
The 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.
| Note: | The number of unemployed people (estimated from the ABS labour force survey) is not the same as the number of people receiving unemployment benefits (where specific eligibility criteria apply). Data on the number of people receiving unemployment benefits are published separately on the Commonwealth Government’s Labour Market Information Portal. |
Unemployment rate
The proportion of the labour force who were unemployed during the reference period.
Youth unemployment rate
Used 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.
| Note: | Published by ABS in original terms only (not seasonally adjusted or trend).Historically, the term "youth" commonly referred to 15 to 19 year old people. More recently, the ABS has published data relating to 15 to 24 year olds as a standard item in its publication and tables. The 15 to 24 year age group is considered a more useful definition of "youth" for the purpose of youth unemployment - because the proportion of 15 to 19 year olds who are in the labour force is relatively low (particularly as most young people are now at school until at least the age of 17). |
Under-employment
Refers 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.
| Note: | People who normally work full-time, but only worked part-time in the reference period, are also considered to be under-employed in that period. |
Under-utilisation
The 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.