Refer to Exhibit 18-5. Suppose that real GDP increased 3 percent from 2015 to 2016 and increased 5 percent from 2016 to 2017. What was the average increase in real GDP from 2015 to 2017?

Question

Quizplus · Accepted Answer

The average increase in real GDP over the two years is found by taking the geometric mean of the two growth rates, not the arithmetic mean. This is because the growth rates compound on each other. The calculation is $\sqrt{1.03 \times 1.05} - 1 \approx 0.04$ or 4%.