The free trade implications of differential fertility and longevity between countries: a 3x2x2 overlapping-generations general equilibrium analysis
Arbatlı, Cemal Eren
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overlapping-generations model with lifetime uncertainty and altruistic agents to investigate the welfare implications of fertility and longevity differentials between trading countries. In the first model (the basic model), agents optimistically assume that they will survive into old age with certainty and have a constant saving rate. Agents in the second model (the anticipation model), on the other hand, correctly anticipate the mortality rates and adjust their saving rates accordingly. The models are solved both under autarky and a Heckscher-Ohlin free trade setting. The analytical results on the direction of the effects of changing population dynamics under lifetime certainty are complemented by numeric results under lifetime uncertainty that provide important insights on how increasing longevity and declining fertility rates may affect the welfare prospects of countries that are at different stages of demographic transition. The solutions reveal that longevity differentials are sufficient to create grounds for trade between countries with equal as well as different population sizes. In a closed economy, when mortality rates are perfectly anticipated, the marginal benefit of higher longevity gradually diminishes as the life expectancy increases and/or the fertility rate decreases. Consistently with this result, as demographic transition proceeds, free trade under longevity differentials tends to make the lowmortality country better off and the high-mortality country worse off compared to autarky.
Overlapping-generations general equilibrium model