Many people are mystified by concerns about whether the economy grows at rates of 2 percent, 3 percent, 4 percent, or whatever the small number happens to be. Policymakers and economists worry about these small numbers because each 1 percent of growth represents extra production of roughly $70 billion worth of 1995 U.S. GDP---hardly small change. Because continuous growth is compounded over the years, each 1 percent difference in the annual growth rate would mean a total difference of over $800 billion in production between 1995 and 2005---more than $3,000 for every man, woman, and child in the United States.

 

            Growth is a cumulative process analogous to compound interest. If you are paid 10 percent interest on $100 compounded annually, then at the end of the first year your $100 stake is worth $110. At the end of two years you have interest on both the principal plus the accumulated interest, so your original $100 is now $121: [(1.10 ¢ ($100 + $10) = $121]. And so on. The rule of 72 simplifies calculations that require compounding.

The Rule of 72 is a "rule of thumb" whereby the time required for any variable to double is calculated by dividing its percentage rate of growth into 72.

 

            This rule works because growth or decline is compounded. Thus, if the annual interest rate is 10 percent, financial investments will double in about 7.2 years, not 10 years. A country's population will double in 36 years if population growth is 2 percent annually, but it will require only 18 years to double at a 4 percent annual rate of increase.