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|
|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.