Friday, November 14, 2008

How Growth Is Expressed In Different Countries

I try to be clear and avoid expressing myself in ways that confuses people. But sometimes that still happens as I assume that people are aware of all of the confusing aspects in which economics is discussed, which is not always the case. In my recent post about U.S. retail sales I wrote that I expected GDP to fall by more than 4% during the fourth quarter. That's bad, but it's not as bad as one reader thought it was, who believed that this meant that fourth quarter GDP would be 4% lower than third quarter GDP.

There are basically three ways in which quarterly growth can be expressed.

The first is the American way. Here growth is expressed in change from the previous quarter in annualized terms. Annualized terms means the 4 quarter change that would happen if the quarterly change was sustained for 3 more quarters.

The second is the European way. Here growth is expressed in quarterly change in absolute, non-annualized terms.

The third is the Chinese way. Here growth is expressed in change compared to the same quarter the previous year.

I call it the American, European and Chinese way as they are the most important countries/regions using the different ways of expressing growth, but many other countries choose to use these 3 different ways of expressing growth.

For example, let's say a country sees its GDP rise by 1% compared to the previous quarter in absolute terms and 3% compared to the same quarter last year. Using the American way of expressing growth, growth would be 4%, using the European way it would be 1% and using the Chinese way it would be 3%. Because the same data can be expressed in three different ways, it can be confusing. I will try to at least sometimes point out this briefly in future posts discussing growth in different countries, but in case I forget remember that I am using the local way of expressing growth (because I have readers from all over the world there is no common standard for them) and remember the difference in how numbers are expressed when comparing for example European and American numbers.


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