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Population and Economic Growth

Population and Economic Growth

What do you think of when you hear population and economic growth together? Do you believe there is a positive association between the two? A negative one? The truth is, it's complicated. Population and economic growth are economic concepts that don't always follow the same rules between countries. Continue reading to learn more about how these concepts interact with one another, which effects they have, and more!

Effects of Population Growth on The Economy

Population growth has many effects on the economy. First, let's go over the definition of population growth: the increase in the number of people in a given area. With this definition, how can we apply it to the economy?

Population growth may have a positive effect on the economy. For example, an increase in the number of people in the United States will lead to more access to labor, which will lead to higher productivity, which then will lead to more goods being produced. Output (as measured by GDP) will increase in the country as a result! More people in the country will also lead to more demand for goods. Demanding and producing more goods will yield economic growth. This is an example of population growth having a positive effect on the economy.

Population growth may also have a negative effect on the economy. For example, what if there is an increase in the number of people in the United States, but many of them are not able to work? No greater access to labor, no higher productivity, and no extra goods being produced. However, the demand for those goods is still higher, since there are more people in the United States than before. There is more demand with relatively the same supply leading to an increase in prices. This is an example of population growth having a negative effect on the economy.

Population Growth is the increase in the number of people in a given area.

Think of supply and demand! An increase in demand with no change in supply will increase price level and output. An increase in both demand and supply will increase the output with no change in the price level.

Population and Economic Growth, Population Around the World Growth Effect of Population Growth on the Economy, StudySmarterPopulation Around the World, pixabay

Population Growth and Economic Development

Let's discuss population growth and economic development. Population growth can be a potential catalyst for economic development. Will a country with 100 people produce more goods than a country with 100,000 people? Of course not! A country with a larger population will have the potential to increase its output more than a country with a smaller population. But just because a country has a large population doesn't mean that it will automatically develop its economy.

Developing countries experiencing a sudden spike in population can be problematic for a variety of reasons. Developing countries do not have the infrastructure or human capital to keep up with a large influx of people — an increase in output is not guaranteed in this situation. Institutions are also not as well trusted by other countries which makes it hard to engage in trade in the first place. Developing countries will end up being strained to keep up with a growing population.

So what is the correct approach? Is population growth good or bad for economic development? It depends on many factors that make it impossible to give a conclusive answer. Some factors include the following: trust in institutions, human capital, and infrastructure. Overall, it is important to recognize that population growth can have different outcomes on economic development depending on the current state of the country.

Developing countries are countries with fragile infrastructure and low average per capita income.

Population and Economic Growth, Population Growth in the United States Population Growth and Economic Development graph, StudySmarterFigure 1. Population growth in the United States, StudySmarter Originals. Source: The World Bank1

The graph above shows the population growth in the United States from 1961-2020. As you can see, the United States has had volatile population growth for the past few decades. Sometimes it is steadily declining; sometimes it is steadily increasing; sometimes it rapidly shoots up or down.

Relationship between Population and Economic Growth

What is the relationship between population and economic growth? Does a larger population cause economic growth? Or does a country with economic growth cause its population to increase? We can see examples of economically prosperous countries with large populations, but how did they get there? Which concept causes the other? Let's go over examples of both phenomena to understand this relationship.

Relationship between Population and Economic Growth: Population Growth Causes Economic Growth

How might a larger population cause economic growth? The easiest path to economic growth through the population is labor. More people in a country can lead to a larger workforce and easier access to labor. More labor will lead to more products being produced which will then cause economic growth. Population growth allows for the expansion of labor and products which then grows the economy.

It is not just about more products being made, there must also be demand for those products! With a larger population, there will inevitably be more demand for products. Since the supply of products is growing due to the increased labor, the increased demand will be addressed. Overall, the population growth caused economic growth with more people demanding and supplying products!

Relationship between Population and Economic Growth: Economic Growth Causes Population Growth

If population growth certainly causes economic growth, then we would not see economically poor countries with large populations. Is it possible that, instead, economic growth leads to population growth?

It is entirely possible that economic growth entices people to move to economically prosperous countries for more opportunities. An economically prosperous country is likely to have more jobs and entrepreneurial opportunities for people. An economically prosperous country is also likely to have better infrastructure, such as roads and bridges, causing more interest in immigrating to the country.

Unfortunately, there is no clear answer to the relationship between population growth and economic growth. There are theories that predict how the relationship will play out, but no definitive answer to its outcome.

Small countries can also be economically prosperous! Many of the Nordic countries are small but are economically well off.

Positive Effects of Population Growth on Economic Development

Let's discuss the positive effects of population growth on economic development. What do more people in a country do for the economy? There are more buyers and sellers — this is pivotal for economic growth! More products can be made and purchased from a growing population.

The demand for all goods will increase as a result of a growing population. Recall that a key component of Aggregate Demand is consumption — with a growing population, increased consumption is likely to occur. Since a growing population will also mean growing labor, the increased demand will be met with increased supply and economic growth will occur.

Other positive effects of population growth all factor into economic growth and development. For example, a growing population is likely to have innovative and creative minds who will go on to become entrepreneurs — hopefully leading to innovation within the country itself! This, of course, will also help in economic development.

Population and Economic Growth in Developing Countries

Let's go over population growth and economic growth in developing countries. Developing countries typically have fragile infrastructure and low average per capita income. Therefore, population growth will not directly lead to economic growth. In fact, population growth will likely cause economic stagnation in developing countries.

Why might population growth be bad for developing countries? Without the proper institutions and infrastructure, developing countries cannot meet the demand of a growing population. For example, if there is an influx of demand for resources but no more supply of those resources, then the country will have to raise prices on the existing supply — leading to inflation. There will also be a scarcity of all resources, such as land, food, shelter, and clothing. Institutions and infrastructure designed to keep up with a growing population can get around these issues. However, developing countries are not in the position to maintain a growing population within their borders.

Population and Economic Growth, Bridge Infrastructure Population and Economic Growth in Developing Countries, StudySmarterBridge Infrastructure, pixabay


Population and Economic Growth - Key takeaways

  • Population Growth is the increase in the number of people in a given area.
  • Developing countries are countries with fragile infrastructure and low average per capita income.
  • The relationship between population growth and economic growth is inconclusive; both can cause the other to happen.
  • The positive effects of population growth on the economy revolve around increased output.
  • Developing countries struggle with population growth due to a lack of institutions and infrastructure.

References

  1. The World Bank, U.S. Population Growth, 1961-2020, https://data.worldbank.org/indicator/SP.POP.GROW?locations=US

Frequently Asked Questions about Population and Economic Growth

Economic growth may grow the population — economic growth may also stagnate the population.

The relationship betwen the economy and population growth is undetermined — there can be both a positive or negative relationship between the two.

Yes, the economy can grow without population growth, but it can be made easier if it does have population growth if the infrastructure is in place for the country to succeed.

Population growth is important because it can help with economic growth. 

The relationship between population and economic development is not conclusive. Population growth can cause economic development; economic development can cause population growth.

Final Population and Economic Growth Quiz

Question

What is population growth?

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Answer

Population Growth is the increase in the number of people in a given area.

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Question

What are developing countries?

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Answer

Developing countries are countries with fragile infrastructure and low average per capita income.

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Question

What is a positive effect of population growth?

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Answer

Economic Growth

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Question

What does a country have more access to with an influx of population?

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Answer

Labor

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Question

What is the relationship between population and economic growth?

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Answer

Inconclusive

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Question

What is a key component of aggregate demand that is affected by population growth?

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Answer

Consumption

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Question

An increase in demand with the same supply will cause what?

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Answer

Inflation

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Question

An increase in both supply and demand will cause what?

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Answer

Economic Growth

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Question

True or False: Economic Growth can cause population growth

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Answer

True

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Question

True or False: Population growth for a developing country can cause problems.

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Answer

True

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Question

Which of the following is NOT a benefit of population growth?

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Answer

Disinflation

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Question

Which of the following is an effect of population growth in developing countries?

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Answer

Economic Stagnation

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Question

What happened to the U.S. population growth in 2020?

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Answer

Population grew

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Question

True or False: The relationship between economic growth and population growth is inconclusive.

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Answer

True

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Question

True or False: The economy can NOT grow without population growth.

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Answer

False

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