Macroeconomic Policy

Hypothesis: Countries that showed a substantial decline in population growth are richer now than countries where population growth is still high

Introduction

The population growth rate affects both the consumption and the productivity of a country’s economy. It is still debatable whether high population growth is a boon or a bane to economic growth. One extra person can contribute one pair of hands for labour but also one mouth for consumption. Therefore, it is significant to discuss the effects of population growth on economic growth (real GDP per capita) in developing countries. Are developing countries with a notable decrease in population growth richer now than those where population growth remained high?

Background

There is certainly a close relationship between population growth and economic growth. Solow (1956) asserts that an increase in the population growth rate can reduce the capital per worker as well as the steady-state output per worker. The Solow growth model explains how population growth determines capital accumulation, which in turn determines economic growth.

The Solow Model

Population growth increases the size of the labour force over time, encouraging economic growth. An increase in number of workers while capital stock remain constant results in capital dilution - growth in the labour force that leads to less capital per worker. In other words, population growth affects capital accumulation in much the same way as depreciation. Depreciation lowers kt because the capital stock is used up from wear and tear, while population growth lowers kt by increasing the numbers of workers per unit of capital. The steady-state level of the capital-labour ratio k* is now at the intersection of the investment (sAkt0.3) function and the depreciation and capital dilution, (δ + n)kt line, as shown in Figure 1. At the steady state, kt is constant, however output, capital and labour are all growing over time at a rate of n. (Mishkin, 2012)...