Saturday, August 29, 2015

Economic Growth Rates: what do they mean?

Hardly a news bulletin goes by without a mention of economic growth, whether it be the 7% talked of in connection with China or the 2% associated with the UK economy. Almost always there is an underlying framing of the discussion with more being better, an increase in growth being good, a decrease bad news.
Leaving aside for the moment what the GDP number actually measures, whether it measures what is useful or not, let’s look at the arithmetic.  Few folk, I suspect, think too hard about the implications of growth over time, over the timescales of human interest, of ourselves and our grandchildren.
Here’s a table, a little ready-reckoner, showing what happens to a hundred pounds worth of economic activity at different growth rates to the end of this century.

At a very modest growth rate of 1%, which most politicians would regard as failure, the economy doubles in size by the year 2085.  If China keeps up its 7% rate it will have doubled in less than a decade.  I’ve coloured the doubling time year in blue for different growth rates.
Let’s pause for a moment to consider what doubling the economy looks like.  We see the economy though the money in our bank accounts, in the amount of shopping we do, the number of cars on the road.  What would our local high street look like if the economy were doubled?
Having twice as much money in our bank account might seem like a nice idea, but think the implications through.
Imagine what multiplying the economy by ten would do.  That’s what we get with a 3% growth rate before the end of the century, or by mid-century at the Chinese rate of 7%.  Colour red. Imagine!