Relating Demography to Trade Imbalances through Theoretical Modeling and Numerical Simulation

Demographic transitions occur at different times and speed across different economies, and age structures consequently differ across regions. Using a solvable four-phase model, we show that economies with a higher proportion of working-age force and a lower dependency ratio tend to have higher savings rates. Because the demographic ＂ center of gravity＂for investment demand falls at a younger point in the age distribution than that of savings supply, countries with a younger age-distribution like those described above generate national savings in excess of domestic investment, resulting in a current account surplus. Numerical simulation supports this hypothesis. But the relative youth or age of a country＇s population reflects temporary demographic trends which change continuously. Therefore, while trade imbalances caused by demographic factors are structural and long-term, they are not permanent, and may be reversed by changes in age structure.