Sustained growth of per capita real GDP is a highly important aspect that can help in changing a poor and developing society to a wealthy one.This is because of its economic growth which is similar to compound interest.
To make this aspect clear, let us take a quick peek of compound interest in this growth aspect.
Compound interest
Let us assume that you have managed to save $100 from your salary. Now, you have put that amount in the bank. The bank gives you a yearly 5% interest rate on your deposited amount. After a year, the principle amount in your account will be $105 ($100 + $5). On leaving that amount again with your bank will help you earn another 5% on that amount. This means you are earning an extra interest on your interest.
Now,suppose you leave your money with that bank for another 5 years. This deal will become even more interesting as you will be earninginterest amount on principle balance. This principle balance will not be that initial $100 which you deposited in the 1st year. The amount will increase as $110.25, $115.76, $121.55, $127.63, and $134 respectively.
This showcases the growth of your money at a pace of 5% per year. If you leave your money even after that period, your money will grow and reach nearly $200. Are you aware how long will it take for you money to reach that point? We will know its answer if we follow a simple formula known as Rule of 70. This rule helps us understand the total number of years that it takes for any variable level to get itself doubled.
In this process, yearly percentage growth rate related to any variable helps in dividing 70 (approx.).This means if you want toknow the number of years that takes $100 to convert into $200, your formula will be:
70 / 5 = 14 years
Links of Previous Main Topic:-
- Definition of Economics
- Economic Problem
- Market Equilibrium
- Employment and Unemployment
- Economic Growth Macroeconomics
- The Basics of Economic Growth
Links of Next Macroeconomics Topics:-
- Economic Growth Trends
- How Potential GDP Grows
- Why Labor Productivity Grows
- Preconditions for Labor Productivity Growth
- Physical Capital Growth
- Human Capital Growth
- Technological Advances
- Growth Theories Evidence and Policies
- Classical Growth Theory
- Neoclassical Growth Theory
- New Growth Theory
- New Growth Theory Versus Malthusian Theory
- Sorting Out the Theories
- The Empirical Evidence on the Causes of Economic Growth
- Economic Growth Macroeconomics
- Policies for Achieving Faster Growth
- The Exchange Rate and the Balance of Payments
- The Dollar and Carry Trade
- Expenditure Multiplier Know the Keynesian Model
