Sunday, May 23, 2010

Why inferences based on percentage growth might be erroneous

What conclusion/inference is most-likely to be drawn by analysts, bloggers and journalists based on the following chart, representing the year-on-year percentage growth in a country's annual GDP (or a company's annual revenue)?

Most are likely to claim that growth in GDP has slowed down over the years.

Incorrect, in my opinion. The full picture - below - says something else (click to enlarge):

It can be seen quite clearly that even though in percentage terms growth appears to have slowed down over the years, in reality the absolute growth is actually increasing each year (over previous year). Hence, one needs to be careful while drawing inferences based on percentage figures.

An analogy to explain the above is using 'motion' (in context of physics). In the above scenario, GDP represents distance, 1 year can be taken as 1 hour, GDP for a year is the speed, absolute GDP growth is an indicator of acceleration, while 'year-on-year change in absolute GDP growth' represents jerk (rate of change of acceleration). In this case, while the acceleration is positive, jerk is negative ('growth of growth of GDP' is slowing down).

PS: This thought was ongoing in my mind for many months, and I've finally written it today.

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