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 GDP affected by population size?
To be sure, a higher population nearly always means a larger economy overall. A greater GDP will result from more labor, customers, and government spending. However, per capita (i.e., per person) GDP, not the overall size of the economy, determines a country’s level of living.
Does population growth enhance GDP?
Higher population growth rates would definitely lead to higher economic growth rates if population growth and per capita GDP growth are fully independent. It would still be true that, as Piketty (2014) points out, only increases in per capita GDP lead to increases in economic well-being.
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.
When the population grows, what happens to real GDP?
The average rise in real GDP per person is measured by economic growth per capita.
We might achieve annual economic growth of 3%. However, assuming population growth remains at 3%, average earnings Real GDP per capita will remain unchanged.
If the population falls by 2% per year but real GDP rises by 1%, the effective increase in real GDP per capita is 3%.
It is critical to include population because it provides a more accurate picture of how economic expansion affects the typical individual.
UK real disposable income per capita
The UK has had a population increase in recent years, with annual population growth averaging around 0.60.8 percent.
For example, between mid-2013 and mid-2014, the population of the United Kingdom increased by 491,100 people (which included net migration adding 259,700 to population growth). (BBC)
As a result, with population growth of slightly under 1% per year, real income per capita is growing at a slower rate than headline real GDP.
Real household disposable income per head is a good indicator of living standards.
The actual disposable income per person increased in 2015, according to these quarterly figures. However, actual per capita incomes are still lower than in 2007.
Another graph illustrates the real GDP per capita. This illustrates that real GDP per capita has only recently caught up to real GDP per capita in 2007.
Note that real GDP includes actual household incomes as well as other items like rent, profit, and dividends.
Real GDP vs real GDP per capita
Economic growth headline metrics might give a false sense of living conditions. Real GDP will always rise as the population grows, but this does not cause it to rise on its own.
When comparing rates of economic growth between countries, real GDP per capita is the most appropriate comparison.
For instance, suppose Japan’s population growth is -1 percent whereas the UK’s population growth is 1%.
Ceteris paribus, you’d anticipate headline economic growth in the UK to be 2 percentage points greater than it is now.
Why is population growth beneficial to the economy?
In the industrialized world, an aging population combined with a lower birth rate speaks to a slowing of future economic development. Productivity gains can mitigate the effects of population shifts, and technology advancements are an excellent source of productivity gains.
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 factors influence GDP growth?
Economic development and growth are impacted by four variables, according to economists: human resources, physical capital, natural resources, and technology. Governments in highly developed countries place a strong emphasis on these issues. Less-developed countries, especially those with abundant natural resources, will fall behind if they do not push technological development and increase their workers’ skills and education.
What effect does population increase have on the amount of GDP per person?
What effect does population increase have on the amount of GDP per person? The rate of population increase is inversely proportional to GDP per capita: the higher the rate of population growth, the lower the GDP per capita, and vice versa.