Exponential growth is a universal principle and can be used to describe any increase that is proportional to what is already there. In other words, even though the growth rate remains constant, each successive period of time the amount of growth is greater than the previous period.
The concept is very powerful because the results have great implications in finance and many other areas of study including science. Important studies in exponential growth are constantly being done in areas such as world population growth or the spread of bacteria.
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Is There a Difference Between Exponential and Compound Growth?
What is the difference between exponential growth and compound growth? The simple answer is: there is no difference. Compound growth is a term usually used in finance to describe exponential growth in interest or dividends. Compounding is not linear growth (i.e. 1,2,3,4,5,6,7) but geometric or exponential growth (i.e. 1,2,4,8,16,32,64).
Example of Exponential Growth
Here is a simple example and how it is so powerful. What if someone offered you a choice between 5 million dollars today or 30 payments starting with 1 penny today and double the amount you receive each day for 30 days.
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If you are like most people you would choose the 5 million if you had to choose quickly. That decisions would cost you millions of dollars. The first day you receive 1 cent, the next day 2 cents, then 4 cents, then 8 cents, and so forth. It doesn’t seem possible but by day 15 you would be receiving $164, by day 20 $5243, and by day 30 over 5.3 million dollars just for that day!