A percentage point is a unit used to express the difference between two percentages. It is commonly used to describe the change in an observed or calculated rate. For example, if the unemployment rate increases from 8% to 12%, the increase is 4 percentage points.
A percentage point can be expressed as a fraction of 1, which is often referred to as a basis point. A basis point is one hundredth of a percentage point, so 4 percentage points is equal to 400 basis points.
A percentage point can also be expressed as a decimal. The decimal value is calculated by dividing the percentage point by 100. For example, 4 percentage points divided by 100 is equal to 0.04.
Example of Percentage point
Let’s say the inflation rate increased from 4% to 8% over the course of a year. This 4% increase is the equivalent of 4 percentage points. This increase can also be expressed as 400 basis points or 0.04 when expressed as a decimal.
In summary, an increase of 4 percentage points in the inflation rate from 4% to 8% can also be expressed as 400 basis points or 0.04 when expressed as a decimal.
Formula of Percentage point
The formula for calculating the percentage point is as follows:
Percentage Point = Percentage 2 - Percentage 1
When to use Percentage point
Percentage points are often used when discussing changes in interest rates, inflation, unemployment and other economic indicators. They are also used to compare the performance of different investments or to compare the performance of investments to a benchmark.
For example, if an investment yields a return of 8% and the benchmark yields a return of 4%, the investment has outperformed the benchmark by 4 percentage points.
Advantages of Percentage point
- Percentage points are a useful unit of measure to describe the change between two different percentage values. For example, if the GDP growth rate of a country rises from 3% to 5%, the increase is 2 percentage points.
- Percentage points are also easy to understand, since they are a unit of measure that most people are familiar with. This makes it simpler to explain changes in data or statistics.
- Percentage points can also be used to compare different rates or ratios to each other. For example, if the inflation rate of one country is 8%, and the inflation rate of another country is 5%, the difference between the two rates can be expressed as a difference of 3 percentage points.
Limitations of Percentage point
Percentage point has a certain set of limitations which must be taken into consideration when using it.
- First, percentage points can only be used to compare two percentages. If more than two percentages are being compared, then a different method of comparison should be used.
- Second, percentage points do not accurately measure changes when the original percentage is close to 0. For example, if the unemployment rate falls from 0.2% to 0.1%, the decrease is 0.1 percentage points, but this does not accurately reflect the actual decrease in the unemployment rate.
- Finally, percentage points do not take into account the size of the actual population being studied. For example, an increase of 10 percentage points in a population of 1,000 is much smaller than an increase of 10 percentage points in a population of 10,000.
There are two other approaches related to Percentage point:
- Relative Change: Relative change is a measure of the difference between two values, expressed as a fraction of the original value. It is used to compare the change in a rate or value to the original rate or value. For example, if the unemployment rate increases from 8% to 12%, the relative change is 0.5, which is calculated by dividing the difference (4 percentage points) by the original value (8%).
- Percentage Increase: Percentage increase is a measure of the change in a rate or value, expressed as a percentage of the original value. It is calculated by dividing the difference between the two values by the original value. For example, if the unemployment rate increases from 8% to 12%, the percentage increase is 50%, which is calculated by dividing the difference (4 percentage points) by the original value (8%).
In summary, other approaches related to Percentage point include Relative Change and Percentage Increase, both of which are measures of the difference between two values, expressed as a fraction or percentage of the original value.
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- Akahira, M. (1995). A higher order approximation to a percentage point of the non-central t-distribution. Communications in Statistics-Simulation and Computation, 24(3), 595-605.