Capital Accumulation and Population Growth in Two Sector Closed and Open Economies

Abstract

An overlapping generations model with endogenous capital accumulation and population growth is explored. The rate of return on children is set exogenously, and dictates the required rate of return on capital. If that return is believed to be low, no capital is accumulated. In an international trade context it is shown that a fast population growth economy will have a high interest rate but may accumulate no capital. The policy conclusion is that high population growth countries may be justified in supporting capital accumulation in order to direct domestic investment away from children.