Real Growth Rate Calculator
Adjust your growth figures for inflation to see the true economic progress.
Understanding Real Growth Rate
The Real Growth Rate is an essential economic metric used to determine the actual growth of an economy, investment, or company revenue after removing the effects of inflation. While nominal growth shows the face value increase, it can be misleading if prices have risen significantly during the same period.
The Real Growth Rate Formula
To accurately calculate the real growth rate, economists use the geometric formula rather than simple subtraction. While simple subtraction (Nominal – Inflation) provides a rough estimate, the accurate formula used in this calculator is:
Real Growth Rate = [(1 + Nominal Rate) / (1 + Inflation Rate)] – 1
Why is This Metric Important?
- Purchasing Power: It reveals whether your wealth is actually increasing or if you are simply keeping up with rising costs.
- Investment Analysis: Investors use real growth to evaluate if their portfolio's return is beating the cost of living.
- GDP Evaluation: Governments use "Real GDP" to measure a country's actual economic output without the distortion of price changes.
Real-World Example
Imagine a company reports a 10% increase in revenue (Nominal Growth). During that same year, the country experiences an 8% inflation rate. At first glance, 10% looks like strong growth. However, using the real growth rate calculation:
- Nominal Growth: 0.10
- Inflation: 0.08
- Calculation: ((1 + 0.10) / (1 + 0.08)) – 1 = 0.0185 or 1.85%
The company didn't actually grow by 10% in terms of value; it only grew by 1.85% when accounting for the decreased value of the currency.
How to Use This Calculator
Simply enter the observed nominal growth rate (the percentage change in value) and the current inflation rate. The calculator will automatically apply the geometric formula to provide you with the real growth rate, rounded to two decimal places.