20,000 to 21,000 is 5% — but only if both figures are real
Growth is the change divided by the starting value: 1,000 on 20,000 is 5%. The arithmetic is trivial; the judgement is entirely in the inputs. If both figures are nominal and prices rose 3% over the period, then 5% of nominal growth is about 2% of real growth, and the other three points bought nothing.
This is why published growth figures are almost always real, adjusted using the GDP deflator or a chain-weighted index. When you see a headline growth number, assume real unless told otherwise; when you compute one yourself, deflate both figures to a common base year first or the result will systematically overstate how much the economy actually grew.
A 1.25% quarter is reported as 5.09%, not 5%
US practice reports quarterly GDP growth at an annual rate: the quarterly change compounded four times. A quarter growing 1.25% is published as (1.0125)^4 − 1, or 5.09%. Many other countries report the quarterly change itself, so the same underlying economy produces very different headlines depending on the convention.
The compounding also amplifies noise. An unusual quarter, a strike, a hurricane or a statistical revision gets multiplied by four in the annualised figure, which is why quarter-to-quarter annualised numbers swing so violently and why year-on-year comparisons are often more informative about the underlying trend.
A collapse one year guarantees a spectacular figure the next
Growth is measured against the previous period, so a deep contraction creates an artificially low base. An economy falling 10% and then recovering 11.1% has returned exactly to where it started, while reporting the strongest growth in decades. The 2020-21 sequence produced exactly this pattern across most of the world.
The defence is to compare against the pre-disruption level rather than the previous period alone. Two periods of the same growth rate from different bases are not comparable, and a recovery figure should always be read alongside how far output actually fell.
Nothing about population, distribution or sustainability
Output growth is not growth in living standards. Subtract population growth to get output per head, which is the figure that tracks prosperity. An economy growing 3% with 3% population growth has stood still for the average person.
The rate also says nothing about who received the growth, whether it was financed by borrowing that must be repaid, or whether it depleted resources that will not regenerate. For a period of more than a year or two, compounding matters too: 3% annual growth doubles output in about 24 years, while 1% takes 70, and that gap is what separates economies over a generation.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.