Enter the nominal rate and the inflation rate into the calculator to determine the effective growth rate. This calculator helps to understand the real growth rate of an investment after accounting for inflation.

Effective Growth Rate Formula

The following formula is used to calculate the effective growth rate:

EGR = left(frac{1 + NR}{1 + IR}right) - 1

Variables:

  • EGR is the effective growth rate (annual %)
  • NR is the nominal rate (annual %)
  • IR is the inflation rate (annual %)

To calculate the effective growth rate, divide 1 plus the nominal rate by 1 plus the inflation rate, subtract 1, and then multiply by 100 to convert to a percentage.

What is an Effective Growth Rate?

The effective growth rate is a measure of the real growth of an investment or economy after adjusting for inflation. It provides a more accurate picture of the actual increase in value, as it removes the effects of rising prices on the nominal growth rate. This rate is crucial for investors and policymakers to make informed decisions.

How to Calculate Effective Growth Rate?

The following steps outline how to calculate the Effective Growth Rate.

  1. First, determine the nominal rate (NR) as an annual percentage.
  2. Next, determine the inflation rate (IR) as an annual percentage.
  3. Use the formula EGR = ((1 + NR) / (1 + IR) – 1) * 100 to calculate the effective growth rate.
  4. Finally, calculate the Effective Growth Rate (EGR) as an annual percentage.
  5. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem:

Use the following variables as an example problem to test your knowledge.

Nominal Rate (NR) = 6%

Inflation Rate (IR) = 2%