Country Size, Specialization Patterns and Secular Demand Stagnation
CESifo, Munich, 2017
CESifo Working Paper No. 6752
Using a dynamic two-country two-commodity Ricardian model where preference for money (or wealth) leads to aggregate demand deficiency, this paper examines the relationship between the two countries’ relative population size and their specialization patterns, employment and consumption. When the countries have similar population sizes, they specialize in respective commodities with comparative advantage. In this case a larger foreign, or a smaller home, population raises the relative price of the home commodity. It raises home real income and consumption per capita if full employment prevails in the home country. If unemployment appears, however, home employment and consumption per capita decrease.
Monetary Policy and International Finance
Fiscal Policy, Macroeconomics and Growth