Question

What is the difference between an arithmetic and geometric averages, and what does it tell you about the effect of time on these Nominal Rates?

Answer 1

Arithmetic Average is calculated by dividing the sum of numbers by the number count. while geometric average takes into account compoundng effect while calculating

Use of Arithemetic average is beneficial in situation when data is not skewed and not dependent on other variables while geometric average is used in situations when there is great variability in the data.

Arithmetic average is relatively easy to calculate while calculation of geometric average involves complex calculations

Geometric average is used to calculate the rate of return on an investment over a period using compounding effect while use of arithmetic average is suitable in a situation where variable are not dependent on each other.

Geometric average is used in finance to calculate rate of return over a period while arithmetic average is not an appropriate tool in calculating rate of return in finance

Arithmetic average of two numbers is always greater than geometric average of the same numbers.

Arithmetic average tells the average rate of the numbers of variables in data and place equal weight to each number in the variable while geometric average tells the rate using the compounding effect i.e giving more weight to early numbers and less weight to numbers occured at last.