Posted by: mulrickillion | December 12, 2011

The Relationship between Quarterly and Annual Growth Rates

By Phillip Cross and Diana Wyman

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The Statistics Newsletter – OECD, Issue 54, December 2011, pp. 6-10 —

Growth rates have a distinct dynamic: quarterly growth rates have a fixed statistical relationship with the annual average growth rate. By understanding how individual quarters specifically affect annual averages, analysts can monitor how the economy is performing in a particular year without having complete data for that year, and understand why a particularly weak or strong first quarter of the year has a disproportionate impact on that year’s annual growth rate. It can also help analysts break down economic forecasts or the impact of a revision of a quarterly data point on annual growth. The principles of growth rate relationships conceptually and mathematically are explained here by examining the relationship between quarterly growth rates and annual average growth rates.

The Concept

For major economic indicators, such as real gross domestic product (GDP) and the consumer price index (CPI), annual growth is a baseline measure of how the economy is performing and how prices are changing. The annual average growth rate answers the question of what happened during one year relative to the year before. It is calculated as the percentage change between two consecutive annual levels. These annual levels are the sum of the four quarterly levels of the two adjacent years, or the average if the data has been annualized. . . .

The first, and most important, is that annual growth rates reflect the pattern of growth in both the year being studied(year 2, or 2008 in the examples) and the previous year (year 1, or 2007, in the examples). As a result, in order to understand the annual average growth rate, the quarterly growth rates of the previous year can be as important as those of the current year.

The second principle is that individual quarterly growth rates do not have an equal impact on the annual average growth rate; there is a hierarchy for which quarters have the most impact on annual average growth. The growth rate of the first quarter of the more current year, or year 2, for example, has the largest impact on the annual average growth rate.

The hierarchy of the impact of quarterly growth rates on the annual average growth rate is a characteristic of growth rate dynamics. . . .

>>Read the full Article and/or full publication here (4923023.pdf).

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