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Use Annualized Growth Numbers

Wednesday, 07 July 2010 04:47

It is standard in the United States to report GDP growth and other economic data as annual rates. That is not the case in other countries where it is common to use quarterly growth rates. Rather than just picking up the number as reported in other countries, reporters should convert it to an annualized rate so that their audience in the United States will understand what is being reported. (This is the point, right?) Usually, just multiplying by 4 gets you there, although for higher growth numbers, it would be best to do it right and take the number to the 4th power.

The NYT got it wrong this morning in telling readers that the UK grew 0.3 percent in the first quarter. Its annual rate of growth was 1.2 percent.

Comments (5)Add Comment
written by izzatzo, July 07, 2010 8:06
In the interest of consistent comparability and accuracy, credit card companies in the US will now be responsible for reporting all measures of annual GDP growth in the same way they report measures of annual percentage rate (APR) charges for credit cards. Despite the necessity of reading one thousand pages of fine print to understand it, the net positive benefits of this innovation in economic education are considered worth it.
written by fuller scmidt, July 07, 2010 9:03
4th power? Can you explain how an exponent is involved? Do you mean 4 decimal places?
written by JC, July 07, 2010 11:32
Actually, DB describes the procedure incorrectly. If r_q is the quarterly rate, say r_q = 0.03, then to get the annualized rate, r_a, do
r_a = (1 + r_q)^4 - 1
= 0.126
Taylor expansion (valid for small r_q) gives
r_a approx 4*r_q

written by terryh, July 07, 2010 7:59
Almost right, JC. DB stated that the quarterly rate was 0.3%, which is 0.003, and that would make the annualized rate = (1 + .003)^4 - 1, or 0.012054...., or 1.2054%.
written by JC, July 07, 2010 9:30
Thanks, but I purposely chose a number that was a factor of 10 larger than DB's to illustrate the difference between the approximation and the correct calculation. In any case, what I wrote is, by itself, correct.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.