Aging, transitional dynamics, and gains from trade

Abstract

a b s t r a c tWe formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. Two main results are obtained. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky.

Demographic Change, International Trade and Capital Flows

“…He shows that a country with higher fertility exports labour intensive goods, and that a shift from autarky to an open economy is not necessarily welfare improving. Similar conclusions are drawn by Naito and Zhao (2009).…”

International Trade with Pensions and Demographic Shocks

“…However, this trade does not necessarily lead to welfare gains for both countries. Naito and Zhao (2009) refine this result and also conclude that an ageing country will export the capital intensive good. The old generation in the ageing country gains from trade, but subsequent generations lose during the transition phase.…”

Different demographic changes and patterns of trade in a Heckscher–Ohlin setting

“…2 Although there are many empirical works, theoretical analyses have been recently presented by Naito and Zhao (2009) and Ito and Tabata (2010), concerning the effects of demographic changes, especially population aging, on international capital flows and/or trade patterns. 3 Ito and Tabata (2010) defined aging an expansion in life expectancy, or an increase in the probability of the elderly to survive longer, while Naito and Zhao (2009) defined it as a decline in the fertility rate. Supposing two economies whose initial fertility rates and life expectancies are the same, we may consider the implications of these assumptions as follows.…”

“…2 There is a significant negative link for some countries such as Italy and Japan, but rather no clear correlation for some other economies such as Ireland and Austria. 3 Ito and Tabata (2010) examined international capital flows in a one good-two sector-two country model, while Naito and Zhao (2009) considered trade patterns in a two goods-two sector-two country model. See also, for example, Buiter (1981), for whom international capital flows emanate from changes in time preferences, and Krueger and Ludwig (2007), who also give some simple illustrative models on demographics and international capital flows.…”

“…For our purpose, extending the two factor-two goods-two country model of the Heckscher-Ohlin type à la Naito and Zhao (2009) by incorporating endogenous fertility and human capital investment decisions of individuals, we investigate the effect of opening trade among economies with different life expectancy on trade patterns and the welfare of generations in each country. It is quite clear that the world economy, made up of countries with different rates of population growth, gradually approaches and eventually converges to the autarkic steady state of a country with higher population growth (e.g., Ito and Tabata 2010;Naito and Zhao 2009).…”