Rule of 70 - YouTube

Welcome everyone. This is Alex Tabarrok. Today we're going to be taking a look at

the Rule of 70. The Rule of 70 is a simple rule of thumb which says that if a process

is growing at a rate of x percent per period, then the doubling time is

approximately 70 divided by x periods. So for example, US GDP per capita grows at a

rate of about 2 percent per period. A little bit more than that, but we'll make

our numbers nice. So if the growth rate of US GDP per capita is 2 percent per period,

then the doubling time for GDP per capita is 70 over 2, or approximately 35 years.

So if you're 35 years old today and you have a child, then by the time your child

is 35, his or her standard of living will be about double yours. Again, owing all

else the same. Now let's compare with China. In China, GDP per capita has been

growing for about the past 30 years, at a rate of between 7 and 10 percent per year.

Absolutely astounding. So in China, GDP per capita is doubling approximately every

7 years. So this means that in the time it takes GDP per capita to double in the

United States, in China, GDP per capita will have gone up by 2 to the 5th, or by

32 times. Now, even today China is much poorer than the United States. So what

this tells you is that in the past, China was really, really poor. So poor that they

could grow at this enormous rate and still be poorer than the United States today.

China probably has a few more doublings in its future but you can also guess why

these kinds of numbers that China's probably gonna slow down. Its growth rate

is gonna slow down. We'll talk more about that when we come to talk about the solo

model. Let's use the same technique to look at world population growth rates.

Let's go to Google and pull in some data on world growth rates. Okay, here from

Google is the world's population growth rate and what we see is that in the late

1960s and early 1970s the world population was growing at a rate of about 2 percent

per year. Now the words as we just saw, the total world population was doubling

every 35 years. Today, however, we're much closer to 1 percent per year and in fact

we're even heading downwards, might even go down to 0 percent per year, would not

be inconceivable. At a rate of growth of 1 percent per year, the total world

population doubles every 70 years. This is one reason why I'm not worried about world

population growth rates. We can handle a doubling over the next 70 years. That's

really not such a big problem, and indeed if world population growth rates continue

to decline, and probably even stabilize, there won't be any problem at all, may

even be an issue that we want a larger growth rate.

Okay let's use our Rule of 70 for one more neat little trick. Between 1970 and 2008,

per capita medical spending in the United States grew at a rate of about 4 percent

per year. Now remember US GDP per capita is growing at a rate of 2 percent per year

So medical spending is growing at twice the rate as per capita GDP. In other words

medical spending is growing faster than GDP by 2 percent per year. This means that

as a share of US GDP, medical spending will double in approximately 35 years - 70

over 2. Now today, medical spending as a share of GDP is about 16 percent. If it

continues to grow 2 percent faster than does US GDP per capita, then in 35 years

it'll be 32 percent or approximately a third of the economy. Well, a third of the

economy's spending will be on healthcare spending. On medical spending. Now it's

clear that even if the economy as a whole could handle a rate on medical spending of

a third, that there's many people in the US economy that could not handle that rate

many people below median income. That would be a real problem. So something is

going to break. Either it's gonna be the budget, or it's going to be, hopefully,

we'll be able to slow down the growth rate of medical spending. Either way, the Rule

of 70 gives us a quick and dirty rule of thumb for calculating doubling times and

other kind of interesting percentages. Thanks very much.