In this video, I will give you the final characteristic of growth… Acceleration. Watch now!
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We have been doing a video series on growth. And in this video I am going to be giving you the final item in our list of characteristics of growth.
Up to this point we have discussed four main ideas:
- Growth exists
- Growth continues forever
- Growth is exponential
- Growth rates decrease over time
When we look at this list there is a potential problem. Items two and four seem to be in conflict. How can growth continue forever while growth rates decrease over time? If growth rates are always decreasing, does that mean that growth would eventually reach zero and stop? Not necessarily. There is a way to satisfy both item two and four.
- Growth occurs with constant acceleration
If you maintain constant acceleration, you would grow forever, while your growth rate continually decreases but never reaches zero.
Let us look at an example.
I am going to put up two forecasts. Both start with 100 dollars and show growth over five periods. The top grid shows growth following a constant growth rate. The bottom shows growth following constant acceleration. You will see with constant growth that acceleration increases. However, with constant acceleration, growth decreases. The top method is what is commonly used in the financial world. I am advocating that the method using constant acceleration is better.
The beauty of using constant acceleration in forecasting, is that the physics community already knows how to do this. They have been calculating constant acceleration for a long time to understand the physical world. So the math behind this is very well established. Here is the equation for constant acceleration, and I call this equation the Theory of Credit Markets. This theory says that you can use constant acceleration as an effective way to forecast economic activity.
When you start using this curve, you will be shocked at how useful this is to forecast growth. It creates very realistic growth curves that reflect what we know about the economy.
Let me explain to you how significant this is. Let us focus on a simple business question. If we look at two different countries: the United States and China, which country will have a bigger economy in 100 years. The answer to this question will affect major policy decisions all over the world. Well how are you going to forecast these economies over a 100 year period. We have been discussing two different approaches. You could look at it from constant growth or constant acceleration. If you look at constant growth, China clearly becomes the dominant economy in 100 years. But if you look at constant acceleration, the US is the largest economy in 100 years. You get two completely different answers depending on your forecasting method.
This approach to finance does require more advanced math than accountants normally use today. In the future, accountants are going to need to know calculus and physics. And I talk with business schools all the time. I will call them up and say, “You need to start requiring your accounting students to know calculus and physics.” And they just hang up on me like I am a crazy person. But I am giving you this advanced warning. Forecasting the future is important to everything in Finance. This determines how much the stock of your company is worth. And advanced mathematics is going to become more important in the future. So I would encourage you to learn calculus and learn physics.
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.