Age Structure and Trade Openness: An Empirical Investigation

• Date: 01 June 2017
• DOI: http://doi.org/10.1111/twec.12464
• Author: Yukio Fukumoto,Tomoko Kinugasa
• Published date: 01 June 2017

Age Structure and Trade Openness: An

Empirical Investigation

Yukio Fukumoto

1

and Tomoko Kinugasa

2

1

Department of Economics, Osaka University of Economics, Osaka, Japan and

2

Graduate School of

Economics, Kobe University, Kobe, Japan

1. INTRODUCTION

HISTORICALLY, the scale of recent intern ational trade has been considerable. Bordo

(2002, p. 22) noted that ‘by the 1970s the ratio of trade to GDP reached the levels of the

earlier age of globalization’.

1

International trade is considered to improve economic welfare. It

has also been pointed that growth in international trade induces economic growth (for example,

see Panagariya, 2004). Therefore, the remarkable development of international trade and the

reasons behind this development have attracted the attention of many economists. For example,

Krugman (1995) identified the decline in trade barriers –such as policy-led trade liberalisation

and technology-led reductions in transportation costs –as the main reason for the growth of

international trade. Feenstra (1998) focused on factors other than trade barriers and proposed

that foreign outsourcing accompanied by a breakdown in the vertically integrated mode of

production has been one of the causes of international trade development since the 1970s.

2

In this study, we empirically investigate whether age structure influences trade openness (i.e.

the ratio of trade to GDP). Many macroeconomists and demographers have analysed the effects

of age structure on saving, investment, production, consumption and current account balance.

3

However, they have not adequately examined the effects of age structure on trade openness. We

suggest that age structure influences trade openness, based on differences in the consumption of

tradable and non-tradable goods between the working-age and dependent populations. Tradable

goods are those that can be traded with foreign countries, whereas non-tradable goods are those

that are produced and consumed domestically. Not all tradable goods are imported or exported,

This paper is a revised version of the paper entitled ‘Trade Openness and Demographic Change’, which

was presented at the Brown Bag Seminar of the East–West Center in Honolulu, Hawai’i, on 19 August

2014. We were visiting scholars at the East–West Center from August 2013 to August 2014, and benefited

from discussions with Professor Andrew Mason during that period. This study was developed largely by

taking into consideration the comments from Professor Mason on the topic of population economics. We

also appreciate the valuable comments of Professors James R. Walker, Yoshihiko Seoka, Mitoshi Yam-

aguchi, Ryuzo Miyao, Shigeyuki Hamori, Tsuyoshi Toshimitsu, Yoichi Matsubayashi, Shigeto Kitano,

Kiyotaka Sato, Hidehiko Kamiya, Masahiko Shibamoto and Serena Rhee. Moreover, we greatly appreciate

the two anonymous referees. This paper was improved remarkably thanks to their thoughtful comments.

Finally, we are grateful for the suggestions of the Associate Editor, Professor Chris Milner. This work was

supported by JSPS KAKENHI Grant Numbers JP26292118 and JP24310031.

1

The earlier age of globalisation usually refers to the period from the mid-nineteenth century until

1914.

2

See Feenstra and Taylor (2014, Chapter 7) for further discussion on foreign outsourcing.

3

The study of Modigliani and Brumberg (1954) is primary in this field; they proposed the life-cycle

hypothesis. Many studies –such as Fry and Mason (1982), Mason (1987, 1988), Fair and Dominguez

(1991), Taylor and Williamson (1994), Taylor (1995), Lindh and Malmberg (1998, 1999), Higgins

(1998), Poterba (2001) and Kinugasa and Mason (2007) –have analysed the relationship between age

structure and macroeconomic fundamentals.

©2016 John Wiley & Sons Ltd 1247

The World Economy (2017)

doi: 10.1111/twec.12464

The World Economy

but an increase in the demand and supply for tradable goods will increase imports and exports.

Compared with working-age individuals, dependent individuals tend to consume more non-trad-

able goods; this suggests that an increase in the share of the working-age population will increase

the demand and supply for tradable goods relative to non-tradable goods and thus increase trade

openness. Below, we show that not only trade openness but also the share of the working-age

population has increased since the 1970s, which would seem to support our hypothesis.

The remainder of this paper is organised as follows. In Section 2, we discuss how age struc-

ture affects trade openness. In Section 3, we set up an empirical model that takes into account

several factors suggested to influence trade openness in previous studies. In Section 4, we inves-

tigate the effects of age structure on trade openness. Section 5 presents our concluding remarks.

2. RELATIONSHIP BETWEEN AGE STRUCTURE AND TRADE OPENNESS

To begin with, we discuss how age structure affects trade openness in terms of intergenera-

tional differences in the demand for tradable and non-tradable goods. Next, we discuss

whether our hypothesis is valid based on age structure and trade openness in the period after

World War II. Then, we describe five studies that are closely related to our own study.

Braude (2000) proposed that there exist differences in demand between tradable and

non-tradable goods by age groups. He provided evidence that the share of consumption of

non-tradable goods in total consumption of the dependent population is higher than that of the

working-age population.

4

For example, the consumption share of childcare and education

expenditures is high for the young-dependent population, while that of nursing care is high

for the old-dependent population. In addition, the share of medical expenditures for both the

young and old-dependent populations can be high, compared with that for the working-age

population. Childcare, education, nursing care and medical services are mostly non-tradable,

so that a higher share of dependent population will increase the relative demand for non-trad-

able goods. Consequently, an increase in the share of the working-age population shifts the

non-tradable goods-oriented demand structure to a tradable goods-oriented demand structure.

Braude (2000) insisted that an increase in the share of the dependent population will increase

the prices of non-tradable goods and thus cause an appreciation of the real exchange rate,

which represents the relative price of tradable and non-tradable goods.

5

If tradable and non-tradable goods are not perfectly substitutable, differences in demand by

age groups will change not only relative prices but also the degree of trade openness. An

increase in the share of the working-age population shifts the non-tradable goods-oriented

production structure to a tradable goods-oriented production structure. Even if countries could

produce all tradable goods by themselves, they would not do so. Theoretical studies on

international trade have indicated that countries derive mutual gains from international trade by

becoming specialised in the production of different tradable goods.

6

Therefore, an increase in a

country’s share of the working-age population could increase both the exports of tradable goods

demanded in foreign countries and the imports of tradable goods produced in foreign countries.

4

Braude (2000, section 3.1) mainly used US data around 1990 and showed that preferences between

tradable and non-tradable goods differ among different age groups.

5

Rose et al. (2009) and Groneck and Kaufmann (2015) also investigated whether age-structure variables

affected the real exchange rate.

6

For details on inter-industry trade based on comparative advantages, see Dornbusch et al. (1977) and

Davis (1995). Moreover, Krugman (1979) and Helpman (1981) described a model of intra-industry trade

based on increasing returns to scale and imperfect competition.

©2016 John Wiley & Sons Ltd

1248 Y. FUKUMOTO AND T. KINUGASA