Friday, January 27, 2012

U.S. GDP grows 2.8% to its fastest pace in 1-1/2 years, but slower than expected

"Economists, however, had been betting on a slightly faster fourth-quarter pace of 3%."

That might not seem like a big deal, just .2% less than expected. In my macro courses we read a chapter in the book The Economics of Macroissues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of \$1,000. If we grow 2.0% per year, after 100 years it will be \$7,245. At 2.1% per year, it would be \$7,791 or about \$700 more. That is how much that little .1% matters. The difference over 200 years is about \$11,000. After 100 years at 2.5% per year, per capita income would be \$11,814. That is \$4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Using the latest GDP figures for another example, if we grow 3.0% a year for the next 30 years, and if per capita GDP now is, say, \$50,000, it would reach \$121,363. But if it only grows 2.8% for 30 years, per capita GDP would be \$114,488. That is \$6,874 less than if we grow 3.0%

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With \$1,000)  