The Law of Large Numbers in Economics

by Sue-Lynn Carty

The law of large numbers, at its most basic and as it applies to the economy, suggests that when the economy grows faster than its average rate of growth, its ability to continue to grow at an above-average pace becomes increasingly unsustainable. The law of large numbers goes on to further suggest that because of the inability to sustain the above-average growth rate, economic growth will eventually begin to decrease until the growth rate is closer to the economy’s historical average.

Historical Economic Growth

Economists measure the rate of economic growth over time. By doing so, they are able to determine the economy’s historical average of sustainable economic growth. The historical average of sustainable economic growth as it applies to the concept of the law of large numbers is the economy’s statistical mean. If the economy is experiencing a growth rate above its historical average for a number of years, the law of large numbers suggests that over time, the economy will decrease until it reaches its historical average.

Economic Production

One of the reasons behind economic growth is an increase in overall economic production, measured by the gross domestic product (GDP). The GDP is the total market value of good produced and services provided in the economy over a given period. The law of large numbers suggests that as economic production increases, the more the economy must collectively produce to sustain the high percentage of growth.

Scarcity

Because economic resources of land, labor and capital are scarce, there is a limit on the amount of goods and services the economy can produce and provide. Because this is the case, the economy cannot continue to increase production infinitely. When economic production increases above its historical average of sustainable growth, scarce resources are depleting faster than they can be replaced. As the number of years scarce resources are further depleted increases, the likelihood of the economy becoming unstable increases.

Economic Slowdown

The law of large numbers suggests that as the number of years the economic output is higher than the historical sustainable average increases, the more likely the economy will begin to slow. The slowdown begins with a decrease in economic production. This occurs because of the resources that were once available to support the rapid economic growth are harder to com by. The slowdown in production leads to a decrease in the GDP. The GDP will then continue to decrease until it reaches a mark closer to its historical sustainable average.

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