In business, the geometric mean is particularly useful for measuring what?

The geometric mean is especially useful for measuring average rates of growth because it accounts for the compounding effects of rates, which is common in financial and business contexts. When dealing with growth rates—such as returns on investment, sales growth, or population growth—the geometric mean provides a more accurate reflection of the overall change over time than the arithmetic mean.

For example, if a business experiences a 50% growth rate one year and a 25% growth rate the following year, using the arithmetic mean would suggest a growth rate of 37.5%. However, this does not accurately represent the compounded effect of the two growth rates. The geometric mean, on the other hand, gives a value that truly reflects the effect of consecutive growth rates over time.

By using the geometric mean, businesses can obtain a realistic view of how their performance evolves, especially when dealing with percentages and ratios that multiply over periods rather than add up. This makes it a critical tool in analytics related to growth and performance metrics over time.