Economic forecasting and population

In economic models, population is often a variable determining the size of an economy. The economic forecasts often consider a large population a determinant of a large GDP of a country. Current forecasts of potential GDP in emerging countries also largely depend on the size of their population. However, a large population is not a necessary or a sufficient condition for a considerable size of an economy.

In determining the total contribution of a labour force, human capital is as important, if not more important, than the number of workers. The education of the labour force as well as the quality of the education has to be taken into account when considering the productive capacity of the labour force. Singapore with a relatively small labour force has been able to achieve a substantial level of GDP because of the quality of its labour force. Countries that strive to increase the size of their economy need to invest in human capital. In order to increase the level of gross domestic product, improvement in human capital would be more important than having an abundant supply of unskilled workers.

A large population does not necessarily indicate a large consumer base. Per capita income is more important than a large population. A country with a high per capita income and a relatively small population may have total consumption far more than a low per capita income country with a large population. The expenditure in dollars of an average family in a developed country may outstrip the combined expenditure of many families in a developing country. Again, total consumption expenditure is not dependent only on the number of units consumed but also the type of consumption. The citizens of a rich country may buy fewer expensive cars while that in a relatively poor country may buy scooters or low-priced cars. Even with a small population, the rich country may end up spending more on vehicles than the relatively poor country with a large population. Therefore, it is not only the quantity of consumption but also the type of consumption that is important for the level of GDP.

It is said that foreign direct investment flows into a country with a large population because of an abundant supply of cheap labour and potentially a large customer base. However, cheap labor, if it is unskilled, may fail to attract substantial foreign direct investment. It can only attract limited foreign direct investment that may utilise cheap and unskilled workers to produce low-valued goods and services. Again, a large population does not translate into a large customer base if the average income is low in a country. A country with a large population but a low per capita income may have a small customer base both in terms of units of goods and value of goods.

A large population may also mean that most of the GDP goes into consumption of goods and services and a lower portion is devoted to investment. A low level of investment may mean fewer resources are available to build roads and highways, factories etc. Therefore, a large population may crowd out much needed investment in a country. This may actually reduce the pace of development in a country.

A large population in a low-income country may mean the availability of a large pool of cheap and unskilled labour. When there is a large pool of cheap and unskilled labour, the country usually focuses on the production of goods and services that are labour intensive as it has a comparative advantage in labour intensive production. However, labour intensive production is usually low-valued and the abundant supply of cheap and unskilled labour may limit a country in the production of low-valued goods. Businesses in the country can continue to profit by utilising the pool of inexpensive and abundant labour. They will have less incentive to move up the value chain and the country may find itself stuck in the perpetual production of low-valued goods and services. Again, there may be less economic incentive to adapt new technologies as the outdated technologies that rely on cheap and unskilled labour continue to remain profitable. This may very well act as a barrier for the country to attain a substantial GDP.

It is true that a substantial population has helped the United States to become an economic superpower. It is also true that China has grown rapidly because of a relatively skilled labour force that its large population has provided. However, a large population does not guarantee a large customer base or a skilled labour force. A large population does not necessarily mean that a country has the potential to attain a sizable economy. The characteristics of the population rather than the absolute size of the population are more important in determining the potential size of the economy.


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