An investigation of the effects of population dynamics on growth and trade in an overlapping-generations general equilibrium model

Abstract

In this study, variants of a two-sector, two-factor overlapping-generations model are solved under autarky and free trade scenarios to investigate the effects of population dynamics on growth and trade. Simulation exercises are also performed to develop a deeper understanding of the analytical findings and to visualize the time paths of model variables. These numerical exercises complement analytical solutions, providing significant insights into the nature of initial conditions affecting growth and convergence performance of closed economies. Concerning open economies, possible implications of population growth differentials for the patterns of trade flows between economies that are identical except for population growth rates are explored as in the static Heckscher-Ohlin model. Our analysis shows that population growth rate differentials give way to differences in relative commodity and factor prices, creating the basis for comparative advantages in the same way as suggested by the static Heckscher-Ohlin model. We also show that these demographic differences prevent comparative advantages from getting eliminated in the long-run, thereby allowing trade to continue to occur even after the steady state is reached. Our solutions reveal, however, that trade does not necessarily improve welfare for both parties in the long-run. The explanation we offer for this nicely complements previous studies that obtained similar results using overlapping-generations general equilibrium models within two country set-ups with steady populations.