During one lecture, my current boss Tomas Sedlacek has asked me to do a quick calculation:"How fast would it take to reduce the Czech budget deficit from current 33% of GDP to almost zero?"
It's not a very simple task (when you don't have a calculator and you have around one minute for the answer) but it is not difficult either.
y to follow).
The rule basically says that if you grow by x% a year it would take you 70/x years to double your GDP (assuming zero inflation).
Therefore, it would take you ten years (70/7 as x=7) to double your GDP when growing 7%
a year (real GDP growth).
That means that you would get from 1/3 of debt/GDP ratio to 1/6 debt/GDP ratio.
It would take you another 10 years to get to 1/12 debt/GDP ratio and another 10 years to get to reasonable 1/24, i.e. 4.17% debt/GDP ratio.
The conclusion is striking. It would take 30 years of 7% real growth (impossible) to reduce the debt/GDP ratio to 4% (of course assuming that the debt would remain nominally constant).
The original Rule of 70:
I really like Mankiw's examples, Maynard is the winner, and Milton is the loser. I believe that even Mankiw's
cat is called Maynard (or Keynes?)
