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Dependency Ratio

In the long run, the output of an economy depends upon the level of technology, capital, and labor. Ignoring other factors of production, the production function is best defined by the Cobb Douglas equation = A KαL1-α.  

Although the Cobb Douglas is based on the analysis for the United States, the analysis could be extended for other countries. Capital is a function of investment and depreciation while labor is a function of population growth- fertility rate of a country. The middle Road has an online course on dependency ratio that takes a look at the fertility rate and workforce of selected countries to understand the economic growth in the very long term i.e. 10 years and more.

Dependency ratios of various economies is important to understand the dynamics of long-term economic growth and well-being. Dependency Ratio is defined as the ratio of the sum of the population till 15 years of age and population 65 plus to that of the working-age population. In the long run, a low fertility rate increases dependency on the elderly population and reduces the working population. According to OECD, the total fertility rate in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates. It is calculated by totaling the age-specific fertility rates as defined over five-year intervals.

Video: Part of tutorial on Dependency Ratio | The middle Road 

 

The dependency ratio defines the demographic profile of the population within an economy. In the long run, a low fertility rate increases dependency on the elderly population and reduces the working population. Consider Africa which has the youngest population compared to any other continent in the world. This is positive as a larger labor population will propel the country forward through the adequate allocation of capital and value-added services example human resources training, and equitable quality education. Countries example Canada that have low fertility rates have been able to attract talent globally through immigration policies on the back of their world-class educational institutes, infrastructure, medical, and other facilities. The ratio of workers to the population is an important policy tool to gauge labor participation going forward. Although a decrease in fertility rate leads to an increase in the output per capital in the short term,( due to reduction of population of less than 15 years), in the long term it is harmful as elderly population increases. In the long run, reduction in fertility rates reduces working age population resulting in lowering of labor force participation rate keeping other factors constant.

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