If an economy grows at a rate of X percent per year, it will double in size in approximately 70/X years.
The rule of 70 states a sum of money growing at X per year will double in approximately 70/X years. This rule shows how small changes in the growth rate can have large impacts on the future. For example, in 2016, the United States GDP grew by 1.6%. At this rate, the US economy will double in size in
70/1.6=43.75years
. India, however, grew faster than the United States, at 7.1% in 2016. As a result it will double in size sooner than the United States, in approximately
70/7.1=9.9years
. This formula can be applied to the real GDP of a country to estimate how quickly the entire economy will grow or to the real GDP per capita to estimate how quickly the average person's income and standard of living will increase.
Economic growth is important for the people living in a country because it increases their standard of living. In estimating how long it will take for the real GDP per capita to double, the Rule of 70 also describes how quickly the living standards for people in that country will improve. Developing countries, such as India, see higher growth rates and therefore see improvements in the standard of living over shorter periods of time. These countries have more routes available for economic growth, such as taking advantage of unused natural resources and applying currently available technology, enabling them to grow at higher rates. Industrialized countries like the United States, on the other hand, grow at a slower rate and don't see such dramatic changes in living standards over shorter periods of time.
The rate of growth of income over time matters greatly. If income grows at only 1% per year, $40,000 grows to about $65,000 in 50 years. However, if income grows at 5% per year, that $40,000 becomes over $436,000 in 50 years.
