The rule of 70 is often used in discussions of population growth, and it can also be used to make estimates about economic growth, usually measured by gross domestic product GDP. To calculate the rule of 70 for investments, first, obtain the annual rate of return or growth rate on the investment. Next, divide 70 by the annual rate of growth or yield.
The rule of 70 can also be used to understand economic growth, usually measured by gross domestic product GDP. GDP is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. Because small differences in annual growth rates result in large differences in the size of economies, the rule of 70 can act as a rule of thumb in order to put different growth rates into perspective.
The rule of 70 approximates how long it will take for the size of an economy to double. The number of years it takes for a country's economy to double in size is equal to 70 divided by the growth rate, in percent.
Some economists refer to the "rule of 69" or the "rule of The different parameters—69 or 72—reflect different degrees of numerical precision and different assumptions regarding the frequency of compounding.
Specifically, 69 is the most precise parameter for continuous compounding, and 72 is a more accurate parameter for less frequent compounding and modest growth rates. But 70 is an easier number to calculate with, in general.
For example, assume you want to compare the number of years it would take the U. The economic growth rate is 4. China's economic growth rate is 2. It would take approximately GDP to double. The World Bank. Investing Essentials. Fixed Income Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. According to the BEA, "[E]xamples of factors that may influence seasonal patterns include weather, holidays, and production schedules.
Here's an example of a seasonal factor: On the strength of their new year's resolutions, people join gyms en masse in January. Does this mean the fitness industry has exploded since the previous month? Of course not. To answer the question of whether activity in the industry has improved or deteriorated, your instinct would probably be to compare January's results with those achieved the previous January.
Good instinct: Logically, corresponding quarters don't require seasonal adjustments and that's one of the advantages of a second method for calculating the annual growth rate in GDP. Instead of annualizing a quarterly rate, it's possible to calculate the year-on-year annual rate, which is the percentage change in real GDP between a given quarter and the same quarter in the previous year e.
As mentioned above, that's not the way in which the government reports GDP growth in the U. Source: National Bureau of Statistics of China. Over time, the year-on-year rate is much less volatile than the quarter-on-quarter rate and is subject to smaller revisions. When you look at a graph of the quarter-on-quarter rate, it's difficult to make out a trend.
Furthermore, because it compares corresponding quarters, the year-on-year rate is not dependent on the methodology for seasonal adjustments, which are necessary when you are comparing two consecutive quarters. National statistics offices do not follow a uniform methodology for making seasonal adjustments; year-on-year rates are therefore better suited for international comparisons. The following graph shows both growth rates for the period through You can see that during the Great Recession of , by the time the year-on-year rate red line bottomed out, the quarter-on-quarter rate had already rebounded sharply and was close to flat, suggesting the recession was almost over:.
Both methods have strengths and weaknesses although economic statisticians generally prefer the year-on-year rate. The good news is that any statistical agency worth its salt will publish both rates. Even if they don't, you've now got all the tools necessary to calculate them on your own using GDP figures. But make sure to select the right ones: seasonally and inflation-adjusted is your mantra. And once you've seen how economies are doing on the whole, you may want to start betting on individual parts of them -- i.
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Email us at knowledgecenter fool. Thanks -- and Fool on! By the same logic, after years, the first economy will have doubled in size twice and the second economy will have doubled in size four times- in other words, the second economy grows to 16 times its original size, whereas the first economy grows to four times its original size. Therefore, after years, the seemingly small extra one percentage point in growth results in an economy that is four times as large.
The rule of 70 is simply a result of the mathematics of compounding. Mathematically, an amount after t periods that grows at rate r per period is equal to the starting amount times the exponential of the growth rate r times the number of periods t. This is shown by the formula above.
Note that the amount is represented by Y, since Y is generally used to denote real GDP , which is typically used as the measure of the size of an economy. To find out how long an amount will take to double, simply substitute in twice the starting amount for the ending amount and then solve for the number of periods t.
This gives the relationship that the number of periods t is equal to 70 divided by the growth rate r expressed as a percentage eg. The rule of 70 can even be applied to scenarios where negative growth rates are present.
In this context, the rule of 70 approximates the amount of time it will take for a quantity to be reduced by half rather than to double. This rule of 70 applies to more than just sizes of economies- in finance, for example, the rule of 70 can be used to calculate how long it will take for an investment to double.
In biology, the rule of 70 can be used to determine how long it will take for the number of bacteria in a sample to double. The wide applicability of the rule of 70 makes it a simple yet powerful tool. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile.
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