Title

Aging, transitional dynamics, and gains from trade

Abstract

We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. We obtain two main results. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky.

Keywords: Aging and trade
　　　　　　 Gains from trade
　　　　　　 Overlapping generations model
　　　　　　 Transitional dynamics
　　　　　　 Compensation scheme

JEL Classification: F43, J11, O41

Takumi NAITO
Tokyo Institute of Technology

Laixun ZHAO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059