Question

1. Explain why a small difference in the annual rate of growth can make a big difference as the decades go by.

Answer 1

Answer:
A small difference in the annual rate of growth can make a big difference as the decades go by because of the power of compunding concept. The gain which we get by small annual growth on the first year acts as a principal amount for the second and if the same sequence continues because of power of compounding of growth final difference of number is huge.

where, A = final amount we get
P = initial principal balance
r = interest rate
n= number of times interest applied per unit time
t = number of time period elapse.

As we can see from the equation rate is exponentially related to time, so even a small increase in rate makes a huge amount when time factor is long like few decades 20-30 years.

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