If you are connected to the financial or business world, chances are you would have heard about exponential growth. This concept is generally used for representing an increase over a specific period.
A lot of professionals have been using exponential functions to comprehend variables in their studies, support diverse business decisions and discover factors that are influencing enough for a gamut of data.
However, before anything else, it is essential to understand how such an increase can occur exponentially, especially if you are working in a certain industry that repeatedly depends upon statistical information.
In this post, let’s explore the meaning of exponential growth, who can use it, why it is essential and how it can be calculated with an example.
What is Exponential Growth?
Exponential growth is referred to a data pattern that shows greater increases with time. Thus, it creates an upward trending curve on the graph, known as the exponential growth curve.
In the field of mathematics, when a function includes an exponent (or a power), the calculation will increase exponentially. For instance, if hens laid eggs thrice every year and tripled per year, in the second year, the number would be 27, and it will be 81 in the third year.
Understanding Exponential Growth
In the world of finance, compound returns lead to exponential growth. The power of compounding is one of the powerful forces in this industry. This one concept lets investors create more considerable sums with minimal initial capital.
One of the most common examples of exponential growth is market-linked investments carrying a compound interest rate. Your investments see exponential growth because of compound interest when you invest money in a market-linked investment option for an extended period. This shows how you grow your investment exponentially with minimal initial outlay.
If the account offers a compound interest rate, you will get interested in the principal and the interest amount received from the preceding period. For instance, in the first year, you might get 8% interest on a bond with a face value of Rs.100 that matures in 30 years. Thus, you will get Rs.8.
In the following year, this 8% interest rate will be applied to Rs.108 and not Rs.100, keeping in mind the interest payment you received in the previous year. Hence, with every passing year, interest payments continue to amass and will be considered in the calculations of yearly interest payments by the time your financial instrument reaches maturity.
Exponential Growth Formula
On a graph or a chart, the exponential curve begins slowly. It remains closely flat for a time before swiftly increasing to become almost vertical. The exponential growth formula is as follows:
V=S×(1+R)^T
where,
S is the starting value
R is the rate of interest and
T is the elapsed number of periods
Importance of Exponential Growth
Data that generally increases exponentially is vital for several careers. Apart from this, it is specifically essential in the following domains:
- Finance and accounting
- Business and data analytics
- Scientific studies
- Research and development
Jotted down below are some additional (but equally important) value-added points of exponential growth:
- Encourages Technological Innovation
A lot of applications in the information technology and computer science industries depend upon statistical information for growth analysis. When developing artificial intelligence processes, machine learning algorithms, and automated software, programmers and data scientists may calculate exponential increases in results over time for a specific input in an environment that is surrounded by digitization.
For example, if a developer uses a specific algorithm as an input to create outputs over a certain period, calculating the growth can help comprehend whether or not the increase in value is an exponential function.
- Assists Professionals in Discovering Trends
Whether in finance and business, technology, science or health care, exponential increases in any sort of information can communicate growing trends. For example, clinical researchers might use this factor to graph an increase in positive health results with new medications.
On the other hand, business leaders might also use this function to discover trends in consumer markets, costs of advertising and brand development.
- Evaluates Important Financial Metrics
The accounting and financial industries generally depend upon growth functions to figure out return projections for specific periods. One of the metrics is a compound return. It is an investment return type that accumulates on starting investment principal and any growth the investment comes across.
When compound returns accumulate, your investment account increases exponentially every time there is an increase in the principal. Such an exponential increase can also occur with loans in case of the interest compounds over time and is at an adaptable rate.
Exponential Growth Uses
Often, exponential growth is used in financial modelling. While the concept is quite common in a high-interest savings account, the interest rates do not fluctuate or waver as much during several economic situations. But, when keeping stocks in mind, returns aren’t as smooth as anticipated.
Not just that, the technology sector uses growth rate calculations, such as AI design, machine learning and software development. Moreover, researchers and scientists use mathematical concepts, like exponential growth, to experiment and study several data.
This factor helps in:
- Classifying factors and trends that can cause a multiplying increase in varying financial metrics, such as assets and liabilities, expenses, revenues, investments and compounding interest
Overall, the models of exponential growth are beneficial in predicting the returns of an investment when the growth rate is consistent and doesn’t oscillate recurrently.
Conclusion
Regardless of the industry, it is evident that exponential growth is a highly essential factor that helps you draw conclusions to varying hypotheses. It does not just help financiers but scientists and IT personnel as well, among others. So, whenever you wish to take a huge business or investment decision regarding growth, make sure you consider the exponential growth formula and calculate it thoroughly.
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