Growth Rate


Define Growth rate.


The percentage of increment attained by a specific variable over a certain period of time is known as growth rate. In simple words, it is the difference between two values calculated in terms of percentage of the first value or an initial value. This percent growth rate is sometimes called percent change or rate of change. For investors, this typically represents the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts such as the economy as a whole.


Why do we calculate growth rate?


The calculation of growth rate has different terminologies in different domains. For instance, for investors, it would typically mean the compounded annualized rate of growth of a company’s revenues, dividends and in fact the study of the macroeconomic concepts of the economy at an aggregate level. Similarly, it is a useful indicator to see how a population is moving – is it increasing or declining in a particular area? In fact, growth rate can be used for comparing the growth rate of populations in two different regions. Apart from population as a macroeconomic variable, it can be used for other factors such as unemployment, literacy rate etc. as well.


Different industries have been using this concept in their own way. The use of historical growth rates is one of the most common and simple methods for predicting future growth opportunities. However, higher growth rates in the past do not mean that the same will be estimated in future. And this is precisely because of the continuous change in economic and industrial conditions. For instance, the motor industry witnessed higher growth rates of revenue during healthy economic conditions. But in recession, consumers are more fragile and are less likely to spend their income on purchasing a new car.


Describe the classification of growth rate


There are different terms associated with growth rates that are used as per application. Growth rate may refer to the following;

  • Compound annual growth rate – This is a measure of financial growth vis-à-vis a particular investment over a certain period of time.
  • Exponential growth - It is one of the growth rate classifications wherein a continuous increase in a particular variable at a significantly higher rate is determined.
  • Economic growth – It helps measure the increase in the value of the goods and services produced by an economy.
  • Population growth rate – This helps measure the rate of change in population over a period of time for a particular region.


How to calculate growth rates?


There are different methods for calculating growth rates:

1. Calculation of percent growth rate through straight line method

As stated above, growth rate is the percent change in a particular variable from one period to another. The formula for calculating the same is as follows:



Where Vpresent = present value and Vpast = past value 

The annual percentage growth rate is nothing but percent growth divided by number of years. 


2. Calculating average annual or compound growth rate

The other very common method for calculating growth rate is one wherein the average annual or compound growth rate is calculated. In this method, the interest is compounded annually for a certain time period at a given interest rate. The formula for calculating the future value is as follows:


Where, i = growth rate and n = number of years 


Solved Illustration


In 1990, the population in California was 250,000. It grew to 280,000 in 2000. What is the annual percentage growth rate for California?


VPresent = 280,000
VPast = 250,000
 N = 10 Years



Therefore, the population of California grew by 12 percent from 1990 to 2000. In other words, it rises at an average rate of 1.2 percent annually.


Our experts have solved many questions on Growth rates.



Q The world population growth rate at a certain reference year was 3.5%. Assuming exponential growth of population, after how many years, the population of the world would have increased by a factor 16?


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