Eight tenths of one percent might not seem like a big difference but it can be over time.
See Mix of Slowing Growth, Firm Inflation Worries Investors: Markets fall as another high inflation reading makes it difficult for the Fed to cut interest rates in the near term by David Uberti of The WSJ. Excerpt:
"Gross domestic product expanded at a 1.6% seasonally- and inflation-adjusted annual rate in the first quarter, the Commerce Department said Thursday, a pullback from last year’s quick pace. That lagged behind the 2.4% projected by economists polled by The Wall Street Journal."
That might not seem like a big deal, just 0.8% less than expected. In my macro courses we read a chapter in the book The Economics of Macro Issues. 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 1.6% a year for the next 30
years, and if per capita GDP now is, say, $80,000, it would reach
$128,795. But if it only grows 2.4% for 30 years, per capita GDP would
be $162,962. That is about $34,000 more than if we grow 1.6%.
Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)
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