what is exponential growth 
exponential growth is a pattern of data that shows greater increases with passing time creating the curve of an exponential function the formula for exponential growth is v s x 1 r t the starting value is s r is the interest rate and t is the number of periods that have elapsed the formula calculates v which is the current value to demonstrate exponential growth suppose a population of mice rises exponentially by a factor of two every year starting with two in the first year then four in the second year eight in the third year 16 in the fourth year and so on in this case the population is growing by a factor of 2 each year if mice instead give birth to four pups you would have four then 16 then 64 then 256 exponential growth which is multiplicative can be contrasted with linear growth which is additive and with geometric growth which is raised to a power understanding exponential growthin finance compound returns cause exponential growth the power of compounding is one of the most powerful forces in finance this concept allows investors to create large sums with little initial capital savings accounts that carry a compound interest rate are common examples of exponential growth assume you deposit 1 000 in an account that earns a guaranteed 10 rate of interest if the account carries a simple interest rate you will earn 100 per year the amount of interest paid will not change as long as no additional deposits are made if the account carries a compound interest rate however you will earn interest on the cumulative account total each year the lender will apply the interest rate to the sum of the initial deposit along with any interest previously paid in the first year the interest earned is still 10 or 100 in the second year however the 10 rate is applied to the new total of 1 100 yielding 110 with each subsequent year the amount of interest paid grows creating rapidly accelerating or exponential growth after 30 years with no other deposits required your account would be worth 17 449 40 the formula for exponential growthon a chart this curve starts slowly and remains nearly flat for a time before increasing swiftly to appear almost vertical it follows the formula v s 1 r t v s times 1 r t v s 1 r tthe current value v of an initial starting point subject to exponential growth can be determined by multiplying the starting value s by the sum of one plus the rate of interest r raised to the power of t or the number of periods that have elapsed special considerationswhile exponential growth is often used in financial modeling the reality is often more complicated the application of exponential growth works well in the example of a savings account because the rate of interest is guaranteed and does not change over time in most investments this is not the case for instance stock market returns do not smoothly follow long term averages each year other methods of predicting long term returns such as the monte carlo simulation which uses probability distributions to determine the likelihood of different potential outcomes have seen increasing popularity exponential growth models are more useful to predict investment returns when the rate of growth is steady 