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Fast Growth, Slow Growth: The Rate of Growth of Continuous Processes

This document discusses continuous exponential growth and rates of return. It explains that as the time intervals for compounding growth decrease towards infinitesimally small increments, the effective growth rate converges towards a constant called Euler's number (e = 2.71828). Examples are provided to illustrate continuous growth and calculating the time taken for an object to reach a given mass when growing at a continuously compounded rate.

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65 views2 pages

Fast Growth, Slow Growth: The Rate of Growth of Continuous Processes

This document discusses continuous exponential growth and rates of return. It explains that as the time intervals for compounding growth decrease towards infinitesimally small increments, the effective growth rate converges towards a constant called Euler's number (e = 2.71828). Examples are provided to illustrate continuous growth and calculating the time taken for an object to reach a given mass when growing at a continuously compounded rate.

Uploaded by

Se Nortia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Data Science Math Skills

Paul Bendich and Daniel Egger


Duke University

Fast Growth, Slow Growth:


The Rate of Growth of Continuous Processes
Video companion

1 Introduction
“Exponential rate of growth” can be a discrete exponential rate of growth or a continuous
exponential rate of growth

Discrete rate of growth

$1.00(1 + r)t

How much money would grow in discrete intervals of time t

If r = 100%/year and t = 1, then would have $2.00 after one year,


After 2 years, would have $4.00
After 3 years, would have $8.00...

2 Continuous exponential growth


Euler’s constant e

100% interest per year (discrete)


50% interest for 6 months, then interest on interest for another 6 months.

Interval Factor Repeats Result


1
1 year 1+1 1 (2) = 2
6 months 1.5 2 (1.5)2 = 2.25
3 months 1.25 4 (1.25)4 = 2.44

As time intervals decrease, does result increase in an unlimited way?

No...

1
Data Science Math Skills
Paul Bendich and Daniel Egger
Duke University

Interval Factor Repeats Result


1 month 1.08 12 (1.08)12 = 2.613
1 week 1.019 52 (1.019)52 = 2.693
1 day 1.002739 365 (1.002739)365 = 2.7146
1 hour 1.000114 8760 (1.000114)8760 = 2.71813
1 minute 1.0000019 525,600 (1.0000019)525,600 = 2.71828
1 second 1.0000000317 31,536,000 (1.0000000317)31,536,000 = 2.71828

e = 2.71828, Euler’s constant

Problem A baby elephant weighing 200 kg grows at a continuously compounded rate of


5%/year. How much does it weigh in 3 years?

(200 kg)e(0.05)(3) = 232.4 kg

3 Continuous rate of return


“Log to the base e of x” is given by the symbol ln(x), where ln stands for natural logarithm.

Problem Rabbit population increases in mass at a rate of 200% per year. Population
starts at 10 kg. If they increase at a continuously compounded rate, how many years is it
until they weigh as much as the Earth (5.972 × 1024 kg)?

5.972 × 1024 kg = (10 kg)e2t


5.972 × 1023 = e2t
ln(5.972 × 1023 ) = ln(e2t ) = 2t
ln(5.972 × 1023 )
= t = 27.37 years
2

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