Question

What is the rule of \(70 ?\) If real GDP per capita grows at a rate of 5 percent per year, how many years will it take to double?

Short answer

It will take 1,400 years for real GDP per capita to double if it grows at a rate of 5% per year according to the rule of 70.

Step-by-step solution

Understand the Rule of 70

The 'Rule of 70' is used to estimate the number of years it takes for a variable to double, by dividing 70 by the rate of growth. Given the growth rate here is 5% per year, it is important to note that in the formula, the growth rate should be expressed in its decimal format i.e.5% = 0.05.

Apply the Rule of 70

Apply the Rule of 70 formula to calculate the number of years it will take for the real GDP per capita to double at a growth rate of 5% per year. So, it will be: \[ Years = \frac{70}{Growth\ Rate} = \frac{70}{0.05} \]

Perform the Calculation

Calculate the right side of the equation \[ Years = \frac{70}{0.05} = 1400 \]. Therefore, it will take 1,400 years for the real GDP per capita to double if it grows at a rate of 5% per year according to the rule of 70.

Key concepts

Understanding Real GDP Per Capita

Real GDP per capita is an important term in economics. It measures the average income of each person in a country. This figure is adjusted to account for inflation, making it "real".
Real GDP per capita is calculated by dividing a country's GDP (Gross Domestic Product) by the total population.
It provides a more precise representation of economic prosperity than just GDP alone because it considers population size. Here are key points to remember:

• Reflects the average economic output per person.
• Helps compare the standard of living between countries.
• Adjusted for price level changes, so it removes the effects of inflation.

This indicator is essential in assessing the true wealth and economic health of nations over time.

Deciphering Economic Growth Rate

The economic growth rate is a measure of how much a country's economy has grown over a specific period. It is generally expressed as a percentage that shows the increase in real GDP. This indicates how fast an economy is expanding.
There are several ways to assess and understand the significance of the economic growth rate.

• A high growth rate signals a booming economy, while a low rate might indicate stagnation.
• It's important for setting policy and guiding economic decisions.
• Regular monitoring helps in predicting future economic performance.

Understanding the economic growth rate helps countries plan effectively, manage inflation, and ensure sustainable development for the future.

Grasping Doubling Time

Doubling time is a concept that refers to the period it takes for a certain variable, like real GDP per capita, to double in size. This is crucial for predicting economic growth and planning for future development.
To calculate the doubling time, economists commonly use the Rule of 70. This simple formula provides a quick estimation method without complex calculations. Simply divide 70 by the annual growth rate:

• For example, with a 5% growth rate, doubling time is calculated as follows: \( \frac{70}{5} = 14 \). So, it will take approximately 14 years for an economy to double at this rate.

Keep in mind, though, actual time might vary due to fluctuations in growth rate.
Understanding doubling time can help governments and businesses align their strategies with expected economic trends and changes.