If you’re interested in this article about the difference between absolute growth and relative growth, you might also be interested in How to Lie with Statistics by Darrell Huff.
I searched the other day for the difference between an absolute growth rate and a relative growth rate, and didn’t easily find a helpful answer. I didn’t look too hard though.
Anyway, I figured it out just by thinking about it a little bit.
An absolute growth rate is given in units, while a relative growth rate is given as a percentage.
So, for example, I could have a growth rate of $100 per annum, or a growth rate of 10% per annum. The first growth rate is an absolute growth rate of $100 per annum, and the second rate is a relative growth rate of 10% per annum.
The difference is that an absolute rate just grows linearly, whereas a relative growth rate grows exponentially. So as the table below shows with $1,000 and an absolute growth rate of $100 per annum, after one year I’d have $1,100, after 2 years $1,200, after 3 years $1,300, and so on. Whereas with a relative growth rate of 10% after 1 year I’d have $1,100, after 2 years I’d have $1,210, after 3 years I’d have $1,331, and so on.
| $100 pa | 10% pa | |
|---|---|---|
| Start | $1,000 | $1,000 |
| After 1 year | $1,100 | $1,100 |
| After 2 years | $1,200 | $1,210 |
| After 3 years | $1,300 | $1,331 |
| After 4 years | $1,400 | $1,464.10 |
| After 5 years | $1,500 | $1,610.51 |
Maybe this explanation will help for someone the next time someone searches for the difference between absolute growth rates and relative growth rates.