Does Population Affect GDP?

2. Demographic Trends and Economic Growth Implications

In discussions on the drivers of economic growth, demographic factors have occasionally taken center stage. Thomas Malthus predicted in the 18th century that due to the continuous rapid growth of the world population, GDP growth per capita will decline. Fertility rates, on the other hand, began to decline in the 1960s. The worldwide fertility rate (measured as births per woman) fell below 3 in 2000 and is expected to be below 2 by 2050, down from 5 to 6 before 1950. As a result, the global population growth rate, which was around 1-3/4 percent in 1950, fell to around 1-1/4 percent in 2000 and is expected to be marginally positive by 2050 due to increasing life expectancy. 3 Slowing population growth has been accompanied by a considerable and continued increase in the number of people aged 65 and up, a demographic transition with significant consequences for economic growth and fiscal sustainability. The proportion of the global population aged 65 and more increased from 5% in 1950 to over 8% in 2000, and is anticipated to nearly double to around 15% by 2050.

Demographic shifts can have a variety of effects on GDP growth. For starters, slower population increase means less labor input. Second, decreased population growth has an indirect, potentially negative impact on individual labor supply, as higher tax rates limit the motivation to work. Third, according to the life-cycle hypothesis, people transition from being net borrowers in their youth to net savers in their working years, and lastly to dis-savers in their retirement years. As a result, as the population ages, aggregate savings decline, resulting in lower investment growth and, as a result, poorer GDP growth.

In the September 2004 issue of the World Economic Outlook, the International Monetary Fund, IMF, published a research that looked at the impact of demographic shift on global economic growth (2004).

4 This study indicated that a 1 basis-point increase in the share of working-age (15 to 64) population will enhance per capita real GDP growth (in PPP terms) by as much as 8 basis points using a large multi-country panel regression framework connecting economic growth to population age structure. 5 On the other hand, a one-basis-point rise in the proportion of the population aged 65 and up would reduce economic growth by around four basis points. 6 Unlike the IMF research and others, this note has a smaller geographical scope, focusing solely on advanced OECD economies, but it is more up-to-date, having data up to 2010. 7

3. Demographic Factors and Growth in OECD Countries: Empirical Evidence

In this note, we assume that the level of real per-capita GDP is influenced by demographic and other variables in the following way:

where $$y $$ is the GDP level of country I at time t, and $$X $$ is a collection of relevant variables other than demographics. $$Sigma p = 1$$ reflects the influence of the j-th demographic group on the level of GDP, and $$alpha $$ represents the influence of the j-th demographic group on the level of GDP. (Note that the following equation assumes that changes in population composition have the same effect across all OECD economies.)

The upper panels of Figure 2 show how the age structure of the population has evolved in the United States between 1950 and 2010, to highlight demographic evolution in the postwar period. In 1950, the shares of the U.S. population in the age ranges 0-14, 15-39, 40-64, and 65+ were around 25%, 40%, 25%, and 10%, respectively, as shown in the upper left panel. The upper right panel depicts the considerable population ageing in the United States during the previous sixty years. By 2010, the population share of youth (0-14) and young adults (15-39) had declined by more than ten percentage points, while the senior population share had risen by about five percentage points.

Japan, as is well known, has seen a considerably more rapid aging process. Japan was a fairly “young” country at the end of WWII, with a far younger population composition than the United States. In 1950, the 0-14 and 15-39 age categories each accounted for more than 35 percent of the total population, while only one in every four persons was above the age of 40, as indicated in the lower left panel of Figure 1. Sixty years later, fewer than half of the population was under the age of 40; almost one-third of the population was between the ages of 40 and 64, and nearly one-fourth was above the age of 65. Many studies have shown that Japan’s rapid aging is a major factor in the country’s declining GDP growth.

Is population connected to GDP?

Gross domestic product (GDP) per capita quantifies a country’s economic output per person and is determined by dividing a country’s GDP by its population.
Per capita GDP is a global measure of a country’s prosperity that economists use in conjunction with GDP to assess a country’s prosperity based on its economic growth.
The highest per capita GDP is found in small, wealthy countries and more developed industrial countries.

What effect does population decline have on GDP?

According to the equation above, if a country’s overall population drop is not matched by an equal or larger rise in productivity (GDP/capita), and this condition persists from one calendar quarter to the next, the country will experience a GDP decline, sometimes known as an economic recession. If these conditions persist, the country may be forced into a permanent recession.

The following are some of the possible consequences of a shrinking population that leads to permanent recession:

Basic services and infrastructure are deteriorating. When a community’s GDP falls, demand for essential services like hotels, restaurants, and shops falls. As a result, employment in these industries declines. A shrinking GDP means a shrinking tax base to finance essential infrastructure like police, fire, and power. In order to retain some sort of economies of scale, the government may be obliged to forsake part of this infrastructure, such as bus and railroad lines, and consolidate school districts, hospitals, and even townships.
The reliance ratio is increasing. The dependency ratio is the proportion of people who are not in the labor force (the dependents, aged 0 to 14 and 65+) to those who are (the productive part ages 15 to 64). It’s used to figure out how much strain the productive population is under. Sub-replacement fertility rates promote population decrease, which means that each generation will be smaller than the one before it. When longer life spans are combined, the consequence can be an increase in dependence ratio, putting more economic pressure on the workforce. With the exception of Africa, dependency ratios are expected to rise globally by the end of the twenty-first century.
End-of-life care for the elderly is in crisis. Because of a shrinking population due to sub-replacement fertility and/or longer life spans, population ageing, or the growing proportion of the retired population compared to the labor force, may result in a crisis in end-of-life care for the elderly due to a lack of caretakers.
Funding issues with entitlement programs. If the ratio of working-age people to retirees decreases, funding for retiree programs may be impacted. In 1990, there were 5.8 workers for every retiree in Japan, compared to 2.3 in 2017 and 1.4 in 2050. Furthermore, according to new research (2019), China’s major state pension fund would run out of money by 2035 as the available workforce diminishes owing to the country’s one-child policy’s consequences. With the exception of Africa, this pattern can be found everywhere else in the world, to a greater or lesser extent.
Military power is dwindling. Huge countries with large populations have higher military might than small countries with small populations, assuming technology and other factors are equal. Along with reducing the working-age population, population reduction will also reduce the military-age population, and so military might.
Innovation is dwindling. Because younger workers and entrepreneurs are more likely to initiate change, a declining population reduces the rate of innovation.
There is a strain on one’s mental health. If there is a chronic recession and a simultaneous loss in essential services and infrastructure, population decline may impair a population’s mental health (or morale).
Deflation. A recent (2014) study indicated that Japan’s aging population is exerting significant deflationary pressures.
Unemployment. According to a Slovenian study from 2015, population aging leads to greater unemployment rates and fewer entrepreneurial activity.

What impact does population have on the economy?

Depending on the circumstances, population expansion can have a beneficial or bad impact. A big population has the potential to be beneficial to economic development: after all, the more people you have, the more work you can perform, and the more labor you can do, the more value (or money) you can create. So there’s no way this can’t be good. Farmers have a lot of children for a reason: more children equals more workers.

But, regrettably, it isn’t that easy. More people may be a desirable thing in a society with plentiful resources and money – a wealthy country. However, in countries with low resources, this isn’t always the case. Limited resources and a growing population put strain on the little resources that are available. More people implies more people to feed, more people to care for, more people to educate, and so on. As a result, population can be a bit of a mixed bag.

What is the impact of population expansion on the economy and development?

Third, population increase and urbanization are linked, and urbanization is directly linked to economic development. Cities are the hallmarks of wealthy nations. With limited urbanization, no country has ever achieved high income levels. Population growth raises density, which, when combined with rural-urban migration, results in greater urban agglomeration. And because large metropolitan centers allow for innovation and increased economies of scale, this is crucial for attaining long-term growth. Companies can create things in greater quantities and at lower costs, allowing them to serve a larger number of low-income customers. Companies in Kenya have benefited from increased population density and growth by targeting huge numbers of lower and lower-middle income groups the “bottom of the pyramid.” Their business strategy is viable since they can serve a multi-million customer base that has grown by 25% in the last ten years and is still quickly expanding.

Are we thus on the verge of Africa’s golden age of development? It’s plausible, but there’s no way of knowing for sure. This will be determined by a variety of different things. Larger populations and higher population densities, as the last few decades have demonstrated, are no guarantee of success. However, it appears that present population growth patterns are no longer the fundamental limitation to Africa’s development and may potentially be a positive influence.

What factors influence GDP?

Defined Gross Domestic Product (GDP) Personal consumption, private investment, government spending, and exports are all factors that go into calculating a country’s GDP (minus imports).

What role does population play in globalisation?

The flow of people, goods, and investment capital across countries is influenced by population change. Economic growth is boosted by favorable changes in the population’s age structure.

In the long run, how does population growth effect GDP?

Long-run growth is described as an economy’s ability to create more products and services over time. In addition to pricing and supply and demand, a country’s GDP is intimately linked to population growth.

Determinants of Long-Run Growth

Productivity growth is defined as the ratio of economic outputs to inputs ( capital, labor, energy, materials, and services). When productivity rises, the cost of commodities decreases. Lowering the price of a product or service increases demand for it. Increased demand might result in increased revenue.
Changes in demographics have an impact on economic growth through altering the employment-to-population ratio. The number and quality of available natural resources are among the factors. The population’s age structure has an impact on employment and long-term growth.
Labor force participation: the size of economic sectors and the degree of labor force participation influence economic growth. The labor force participation rate is the percentage of workers who are willing to work. Because of low birth and mortality rates, labor force participation is high in nations with significant growth and industrialization.

Inflation and Excessive Growth

An economy will continue to expand and prosper when economic growth meets the growth of the money supply. In this instance, population growth would increase, but so would the demand for products and services. As a result, there would be more job openings and the employment rate would rise.

When economic growth is unbalanced, however, inflation and excessive growth can occur. Inflation happens when the cost of goods and services rises faster than salaries, resulting in a loss of purchasing power. A drop in demand for goods and services will result in lower revenue and jobs. Population expansion at a high rate results in lower capital per worker, poorer productivity, and reduced GDP growth.

What impact does population growth have?

It is only natural that as the world’s population grows, so will the strains on resources. As the population grows, so does the demand for food, water, housing, energy, healthcare, transportation, and other necessities. All of this consumption adds to environmental degradation, increasing conflicts, and an increased chance of large-scale calamities such as pandemics.

Ecological Degradation

Increased population will eventually result in more deforestation, reduced biodiversity, and increased pollution and emissions, all of which will exacerbate climate change. Many experts believe that unless we take steps to help limit further population growth in the second half of this century, the added stress on the planet could lead to serious ecological disturbance and collapse, potentially jeopardizing the viability of life on Earth as we know it.

Every increase in the world’s population has an impact on the planet’s health. According to Wynes and Nicholas (2017), in industrialized countries, a family with one fewer child might reduce emissions by 58.6 tonnes CO2-equivalent per year.

Increased Conflicts

Scarcity resulting from environmental degradation and overpopulation has the potential to exacerbate violence and political upheaval. Wars over water, land, and energy resources are already raging in the Middle East and other parts of the world, and the unrest is only going to get worse as the world’s population expands.

Higher Risk of Disasters and Pandemics

Many of the recent new infections that have wreaked havoc on humans around the world, such as COVID-19, Zika virus, Ebola, and West Nile virus, began their lives in animals or insects before being transmitted to humans. Humans are losing natural habitats and coming into more frequent contact with wild animals, which is one of the reasons the world is entering “a era of increasing epidemic activity.” Now that we’re in the midst of a pandemic, it’s evident how impossible it is to maintain social isolation in a world where over 8 billion people live.

What effect does population have?

Human population growth has a variety of effects on the Earth system, including:

Increasing the amount of natural resources extracted from the environment. Fossil fuels (oil, gas, and coal), minerals, plants, water, and wildlife, particularly in the oceans, are among these resources. The removal of resources, in turn, frequently releases pollutants and waste, lowering air and water quality and endangering human and other species’ health.
Increasing the amount of fossil fuels burned for energy generation, transportation (for example, vehicles and planes), and industrial activities.
Drinking, agriculture, recreation, and industrial operations all demand more freshwater. Lakes, rivers, the earth, and man-made reservoirs are all sources of freshwater.
Environmental consequences are becoming more severe. To accommodate rising people, forests and other habitats are disrupted or destroyed in order to build urban areas, including residences, businesses, and highways. Furthermore, as the population grows, more land is used for agricultural purposes, such as growing crops and supporting livestock. This, in turn, has the potential to reduce species numbers, geographic ranges, biodiversity, and modify organism interactions.
Increased fishing and hunting, resulting in dwindling numbers of exploited species. If additional resources become accessible for the species that remain in the environment, fishing and hunting can indirectly increase the number of species that are not fished or hunted.
Invasive species are being transported more frequently, either intentionally or accidentally, as people travel and import and export goods. Invasive species thrive and outcompete native species in disturbed ecosystems created by urbanization. Many invasive plant species, for example, thrive in strips of land adjacent to roadways and highways.
Infectious disease transmission Diseases can spread quickly within and among communities when people live in heavily populated places. Furthermore, because transportation has become faster and more common, diseases can easily spread to other areas.

Are there any other cause-and-effect links between human population expansion and other aspects of the Earth system that you can think of?

Learn more about how processes and phenomena associated to the number and dispersion of human populations affect global climate and ecosystems by visiting the pages on fossil fuel burning, agricultural activities, and urbanization.