Heckscher-Ohlin revisited: implications of differential population dynamics for trade within an overlapping generations framework

This paper investigates the implications of the addition of differential population dynamics to a simple 2×2×2 model of international trade within an overlapping generations framework. The two regions considered are assumed to be identical in every respect except for the way their populations evolve over time. The effects of these demographic differences are explored by comparing autarky and trade on the basis of (i) the analytical solutions obtained for the steady-state values of key variables and (ii) the paths of these variables plotted using numerical results from simulation experiments carried out under two different demographic scenarios. Unequal population dynamics are shown to affect the relative abundance of the factors of production in each region, giving rise to differentials in wage rates and rentals for capital under autarky conditions. This, in turn, causes costs of production and relative prices to differ, creating the grounds for trade in the sense of Heckscher-Ohlin (HO). Yet, the results reveal that static HO results cannot be generalized to hold in a dynamic setting where differences in demographics cause factor proportions to evolve independently of trade over time.