Relative Change Formula (Table of Contents)
- Relative Change Formula
- Examples of Relative Change Formula (With Excel Template)
- Relative Change Formula Calculator
Relative Change Formula
Relative numbers, as its name suggests, are the value which is related to other values and dependent on each other. Whereas absolute values are independent of each other. So the term relative change basically used to compare two variables taking into a count their absolute value. This comparison is generally expressed as the ratio which is called relative percentage difference and this number does not have any units. Absolute change normally will not tell you much about the variables and to get more information, we need to use relative change. For example: If we have two set of numbers containing 2 variables each i.e {2,5} and {104,107}. If you see here, the absolute change will be 5-2 and 107-104. Both have the same absolute change and there is no other information we can extract from absolute change. But if we keep 2 and 104 as reference points, then relative change will be 3/2 and 3/104. Although the absolute difference is the same, relative difference is not the same and has a huge difference.
Like explained above, the relative change is normally expressed in % terms and has a reference value. So the formula for relative change is given by:
Where
- A – 1st Variable (Reference)
- B – 2nd Variable
Examples of Relative Change Formula (With Excel Template)
Let’s take an example to understand the calculation of Relative Change in a better manner.
Relative Change Formula – Example #1
Let say you have invested a sum of $10,000 in a Bank and next year the value of your investment increased to $11,000. You want to see what is the absolute and relative change in the value of your investment.
Solution:
Absolute Change is calculated using the formula given below
Absolute Change = B – A
- Absolute Change = $11,000 – $10,000
- Absolute Change = $1,000
So in absolute terms, your investment has increased by $1,000.
Relative Change is calculated using the formula given below
Relative Change = (B – A) / A
- Relative Change = $1,000 / $10,000
- Relative Change = 0.1 or 10%
So in relative terms, the value of an investment has been increasing by 10%.
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Relative Change Formula – Example #2
Continuing the above example, let say you also have invested another $5000 in other bank and that value has increased to $6000 in a year. So, now you have 2 investments and you want to see which has given more return.
Solution:
Absolute Change is calculated using the formula given below
Absolute Change = B – A
- Absolute Change = $6,000 – $5,000
- Absolute Change = $1,000
So in absolute terms, your investment has increased by $1,000.
Relative Change is calculated using the formula given below
Relative Change = (B – A) / A
- Relative Change = $1,000/$5,000
- Relative Change = 0.2 or 20%
So if you see here, although both the investments have given the same returns in absolute terms, Investment 2 is better in terms of relative change. This is because of the fact the reference point of both the investments is not the same. In investment 1, we have earned 1,000 on 10,000 but in investment 2, the same amount we have earned in 1,000. So 2 is better.
Explanation
As explained above, Relative Change is the comparison of two variables and it helps us in analyzing the change of one variable with respect to others. We can use the below mentioned steps to use the relative change concept effectively:
- The first step is to determine the absolute change between the numbers which we want to compare. So we need to take a difference between the two variables we have.
- Secondly, we need to set the reference point because that will help us in determining the relative change. Bear in mind that reference value cannot be zero and we cannot calculate a relative change of that since it is not defined.
- Once we have selected the reference value, we then take the absolute difference and divide it by the reference value to calculate the relative change. So if the values are greater than a reference value, the relative change will be positive and if the values are smaller than a reference value, then relative change will be negative.
Relevance and Uses of Relative Change Formula
Although absolute change sets the foundation of relative change, it does not have practical use as compared to relative change. The concept of relative change is widely used across various field of studies. For example: In the stock market, the relative change is used to calculate the percentage change in stock price/return on different stocks and helps us to analyze which stock has performed well as compared to other. Companies can use this concept to compare various line items in their financial statements and then can accordingly. For example: Let say a company X has revenue of $100 last year and $110 this year. Also cost last year was $80 which has been increased this year to $90. So if we use relative change formula, revenue has increased by 10 / 100 = 10% but cost has been increased by 10 / 80 = 12.5%. So this will impact the profit of the company and they can dig deep and understand why the cost is increasing and can take corrective action to curb the cost. The best thing about this relative change concept is that since it is unitless, it is not bound and can be applied anywhere and everywhere. Be it commercial calculations, management decisions or simply your day to day analysis, the relative change is used everywhere.
Relative Change Formula Calculator
You can use the following Relative Change Calculator
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This has been a guide to Relative Change Formula. Here we discuss how to calculate Relative Change along with practical examples. We also provide Relative Change calculator with downloadable excel template. You may also look at the following articles to learn more –
