The Time Path of the Economy as the Population Moves Towards a Stationary State

This paper is intended as a contribution to the understanding of how population and the economy influence each other in a long-run dynamic setting. We report some simulation results based on a model in which households are assumed to make optimum (from their point of view) allocations of lifetime wealth among commodity consumption, leisure,1 and the bearing and raising of children. The choices are made in a life cycle framework and reflect the expectations of the households about future (shadow) prices of consumption, leisure, and fertility. As choices at the micro level come to be reflected in the macro economy, changes are induced in aggregate output and national income, aggregate savings and investment, relative prices, and other macro-determined variables. New price signals are then sent back from the macro to the micro level, and these in turn induce changes in the household consumption-leisure-fertility choices. In this way the population and the economy interact as they move through time. Of particular interest is what happens to the time path of the economy when there is an exogenous shift in preferences away from children such as to produce ultimately a stationary or zero-growth population. Interest in this question stems in part from a basic interest in the long-term future economic effects of the very sharp reductions of fertility levels that occurred during the 1960’s and 1970’s in North America and other industrialized areas of the world.