People

The model that we have been using has just ten people. Is it realistic to keep the same number…don’t countries with large populations have special economic problems? Isn’t the number of people in a country an important consideration? It can be, and often is. Let’s step away from our fictitious country of Noz with ten people and take a look Roz…that country with a Standard of Living of only 10 thousand Buks. Let’s say that Roz has some natural disasters and some political upheaval, and it does have plenty of people. Remember, we determined that 10 thousand Buks is a minimum living condition…enough to barely get by. What would happen if the leader of Roz decided either to paint more stripes down the roads or do some other “worthy” project with government funds? What happens if he takes a substantial amount of taxes…call it Buks, call it goods and services, call it part of the Gross Domestic Product…out of the economy to paint more lines down the streets? What happens to that average 10 thousand Buks a year income for his people? It has to go down. But remember the people in Roz were already at the barely-get-by level. What kind of shape are the people of Roz in now? What happens to people who don’t have adequate shelter, enough to eat, clothes on their backs? What do these people do? History tells us that they starve, they steal, they plunder other countries or they have a revolution.

People from other countries can help them, but so often that help means not just feeding the people of Roz. Unfortunately so much of the help goes to their Great Leader, who insists on painting more stripes down the roads. Or, the people of Roz go on so long with help from Noz that after a while they expect it, even demand it. Sooner or later the people of Noz say, “We’re not going to help you people of Roz, it lowers our Standard of Living, you help yourself.

Now let’s get to the question. For the sake of this discussion, let’s suppose that Roz has 100 people in it including its leader, the Great Leader of Roz, and he has decided…knowing it’s a fairly poor country…that everybody is going to make the same amount of money. They all work at their different jobs, but they are all going to make the same amount of money, 10 thousand Buks a year. As a matter of fact, even the Leader only makes 10 thousand Buks a year, because he is noble.

Then a couple of things happen. Spilling into Roz comes 50 refugees from the neighboring warring country and also 50 little citizens of Roz are born, so now the population of Roz is 200, not 100. And let’s suppose the 100 new additions produce nothing. What is the Standard of Living in Roz now? Since none of the new additions produces, the Gross Domestic Product is the same, but spread over twice as many people, so it has to be half as much…5 thousand Buks.

Now remember, Roz was already at the poverty level. Any lessening of the income, because of new economic factors, drives down the Standard of Living…so we’ve got…what? We’ve got BIG trouble.

You might say that the fifty little babies really don’t demand that much and why couldn’t the 50 refugees work and add to the Gross Domestic Product. They can, but babies do have a tendency to grow up. And are enough jobs to go around? The significant point is: should those refugees work and each one earn and produce ten thousand Buks a year, then they would have no effect at all on the economy or the Standard of Living. And when those babies become adults, if each one were to produce an additional 10 thousand Buks a year, the Standard of Living for everybody would remain exactly the same. The problem is, that this doesn’t happen. What happens is jobs are already scarce and instead of producing, these newcomers are usually supported at least in part by the people already there, thereby lowering everybody’s Standard of Living. And then, in those countries with “population problems”, additional people create problems over and above the ones that were there before these additional people came on the scene.

Increasing population doesn’t really mean people are going to be worse off only if those that increase the population can contribute to the economy proportionate to their increase. It may be helpful to look at the other side of the coin. If a country does have a population problem, i.e., too many mouths to feed and not enough food, it would serve the country well if the number of mouths to be fed were limited so the country could get to the business of increasing the amount of food needed.

That sounds so elementary that there shouldn’t be a problem in anybody understanding it. The ECONOMIC solution IS elementary…the POLITICAL solution is not elementary. People are driven or affected by tradition, by faith, by politics…especially by politics. To sum up the effect of population versus economics:

AS THE NUMBER OF PEOPLE ARE ADDED TO AN ECONOMY, IF THE GROSS DOMESTIC PRODUCT OF THE ECONOMY DOES NOT INCREASE PROPORTIONATELY, THE STANDARD OF LIVING FOR THE COUNTRY HAS TO GO DOWN.

Too bad some countries don’t understand such a fundamental concept. Think of all the starvation that could be eliminated. But let us go on…next time we’ll discuss inflation and the poverty trap.

Want to read on?
Professor Frankum
How to Understand Economics in 1 Hour

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