Question

Use the following table to answer the questions. $$ \begin{array}{c|c} \hline \text { Year } & \text { Real GDP (billions of } 2009 \text { dollars) } \\ \hline 1990 & \$ 8,955 \\ \hline 1991 & 8,948 \\ \hline 1992 & 9,267 \\ \hline 1993 & 9,521 \\ \hline 1994 & 9,906 \\ \hline \end{array} $$ a. Calculate the growth rate of real GDP for each year from 1991 to 1994 . b. Calculate the average annual growth rate of real GDP for the period from 1991 to 1994 .

Short answer

The annual growth rates of real GDP from 1991 to 1994 are -0.078%, 3.57%, 2.74% and 4.04% respectively. The average annual growth rate from 1991-1994 is 2.57%.

Step-by-step solution

Calculate the growth rate for 1991

The growth rate can be found using the formula, so it will be: ((\(8,948\) - \(8,955\)) / \(8,955\)) × 100% = \(-0.078%\)

Calculate the growth rate for 1992

Similarly, the growth rate for 1992 will be calculated as: ((\(9,267\) - \(8,948\)) / \(8,948\)) × 100% = \(3.57%\)

Calculate the growth rate for 1993

By the same method, the growth rate for 1993: ((\(9,521\) - \(9,267\)) / \(9,267\)) × 100% = \(2.74%\)

Calculate the growth rate for 1994

Again, the growth rate for 1994 is computed as: ((\(9,906\) - \(9,521\)) / \(9,521\)) × 100% = \(4.04%\)

Calculate the average annual growth rate from 1991 to 1994

The average can now be computed using these rates. It will be the sum of the calculated growth rates divided by the number of years. So it will be: ((-0.078% + 3.57% + 2.74% + 4.04%) / 4) = \(2.57% \)

Key concepts

Average Annual Growth Rate

Understanding the average annual growth rate provides a comprehensive view of how an economy or financial metric changes over a set period. It smooths out the fluctuations that can occur year to year, offering a clearer picture of overall progress.
Imagine tracking your grades over a semester. Some tests might be higher or lower, but you calculate your average to understand your performance over time.

The formula for finding the average annual growth rate is:

• Add together your annual growth rates for each year in your period.
• Divide the total by the number of years to find the average.

This helps gauge the sustainable growth trend, useful for future projections or simply assessing past performance.

Economic Measurements

Economic measurements, like Real GDP, are essential tools for evaluating the health of an economy. Real GDP stands for Real Gross Domestic Product, which measures the value of all goods and services produced in a country, adjusted for inflation.
This measure provides a realistic view of an economy's size and its growth trend over time.

Some critical points about Real GDP:

• It's adjusted for inflation to reflect a true change in value.
• Gives insight into the economic activity and living standards.
• Used by policymakers to make informed decisions about monetary and fiscal policies.

Economic measurements help us understand the broader picture of economic performance and guide important financial decisions.

Yearly Growth Calculation

The yearly growth calculation lets us determine the change in Real GDP from one year to the next, indicating whether an economy is expanding or contracting. This is key for assessing short-term economic trends.
Calculating the yearly growth rate involves a specific formula:

1. Take the Real GDP of the current year and subtract the Real GDP of the previous year.
2. Divide this difference by the Real GDP of the previous year.
3. Multiply the result by 100 to convert it into a percentage.

This percentage represents how much the economy grew or shrank in that year.

Calculating yearly growth is crucial for monitoring how various factors, such as policies or external events, impact the economy in a given timeframe.