You might look at 1.399% minus 0.858% and say "that is only a 0.541 percentage point difference." So what is the big deal? Compounding and how it adds up to a big difference over time.
This table shows the per capita GDPs for each country adjusted for inflation in each year (in Canadian 2017$):
|
Country |
1999 |
2024 |
|
Canada |
$48,076 |
$59,529 |
|
USA |
$58,842 |
$83,286 |
According to The Fraser Institute:
"In 1999, inflation-adjusted gross domestic product (GDP) per person in the US was CA$10,766 higher than in Canada. By 2024, that gap had more than doubled to CA$23,757."
Even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.
This reminds me of the Rule of 72. If you want to know how long it will take a number to double, divide 72 by its annual growth rate. An economy that grows 2% a year will double in 36 years while the economy that grows 3% a year will double in 24 years. It will take 12 fewer years to double incomes.
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.
Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)
