Big changes from small differences
Date posted: August 9, 2011
Economists are constantly adjusting their forecasts for economic growth. Usually the changes appear to be relatively small – say, from 3 percent annual growth to 2 percent annual growth. But such small percentages can make big differences in the economy, says N.C. State University’s Mike Walden.
“Well, they may on the surface seem small. And I realize people are busy. They don’t have time to look at these things, so that’s why we have economists around to try to explain them. But when you’re talking about, say, growth rate going from 3 to 2 percent, that can make a big difference over time. Anyone knows who knows anything about the notion of compounded interest understands this.
“And let me give you an example. If the economy were to grow at a 2 percent annual rate, it would take 35 years for the standard of living of the average person to double in the country. But if we’re able to boost that growth rate from 2 percent to 3 percent, it would take only 23 years — 12 years less for the standard of living to double. And I would argue that’s a big difference. That’s a quantum leap in differences.
“So, yes while … it appears we’re using small numbers and we’re making small changes, when you look over a long period of time they can end up really mattering and having big, big changes on our whole life and standard of living.”
Category: Economic Perspective