Friday, March 23, 2007

Economic Growth: A Little Goes Very Far in the Long Run

We all like economic growth, ceteris paribus. It means more for everyone. In chapter 1 of the book The Economics of Macroissues, they discuss how economies with common law systems have grown faster than those with civil law systems. Common law systems do a better job of enforcing property rights and usually grow faster. The difference does not have to be much. In the macro textbook by Krugman and Wells that I use for my video course, they report that Japan has grown at a rate of 1.7% while Mexico has had a rate of 1.1% (those numbers are approximations-I left that book at the office). That does not seem like a big difference. But in the long run, it adds up. If you grow 1.1% per year, after 150 years your income is is about 5.16 times what it started at (so, for example, you go from $1,000 to $5,160). The formula for this is 1.011 raised to the 150th power

But if you grow 1.7% per year. After 150 years, your income is about 12.54 times what you started at (1.017 raised to the 150th power is 12.54). So your income would go from $1,000 to 12,540. But your income is more than double the other country since 12.54 is more than twice 5.16. So that .6% difference each year matters alot in the long run. It might seem trivial or insignificant, but it adds up.

1 comment:

Champ said...

I like the fact, it is neatly proven