Posted by: michaeldavidpower | September 17, 2009

Delayed in Buenos Aires!

How does China do it? By maintaining high growth 8%+ off a rapidly expanding base. It is not so much that China grows “faster” (i.e. 8% then 9% then 10%) but that China grows “bigger”. A $2 trillion economy growing at 8% p.a. will double in 9 years. In the first year, it will add $160bn to its economy. In the ninth year, it adds $300bn. Within 8 years, it will be adding almost double the value each year even though it never grew faster in any subsequent year than the growth rate it achieved in the first year. That is the magic of compound interest.

By the end of 2009, China will have a $5 trillion economy, second only in size to the US’s $14.5 trillion. Suppose it can grow at 10% nominal per annum for 15 years (8% real plus 2% inflation). It will then more than quadruple in size to $20.9 trillion. A not far-fetched doubling of China’s exchange rate during this period would then double this again to $41.8 trillion. This means that the current nominal GDP per capita of $3500 will rise to close to $28000. (Note some dilution due to population growth.)

And then add this thought: by 2045, India’s middle classes will be more numerous than China’s…and that between these two countries, their middle classes will total 3 billion compared to say 300 million today…My brain hurts just thinking about it!

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