Economics "Ask the Instructor" Clip 36 Transcript
How important is the rate of economic growth to you?
Economic growth can be a matter of life or death for people in less developed countries (formerly referred to as under-developed nations.)
You already know that the growth rate matters. But you may not realize how much. For example, $10 growing at 5 percent grows to $11.50 in 50 years. But over the same time period it grows to $18.50 if the compound rate of return is 6 percent. At 10 percent, $10 grows to over $117!
People shopping for a mutual fund also know the importance of compound growth. That’s why mutual funds often advertise their low expenses and remind potential clients that small differences in expenses can, over a long time period, amount to large differences in fund accumulations.
What does all this have to do with the economy? Well, as in the case of a savings account or mutual fund, the future level of real GDP depends on the compound growth rate. Consider the following example in which all dollar values used are expressed in terms of the purchasing power of the dollar in 1996, which, by the way, is the base you used for calculation of real GDP. At the close of year 2000, real GDP percapita in the U.S. was about $37,000. If the overall economy grows at an average rate of 2 percent during your working years, percapita real GDP will increase to about $74,000 by year 2036. But if the economy grows at 3 percent, just 1 percentage point more, real GDP percapita will be about $107,000 by 2036! What a difference that 1 percentage point in growth makes!
Clearly growth rates matter especially over the long-term. For most Americans, a higher growth rate translates into more consumer “stuff”, most of which we would probably agree satisfies wants, not needs. However, for people in less-developed countries economic growth will determine whether or not the average person is adequately fed or housed and for some it’s a question of life or death.