Economic Effects of Population Growth

Updated Jun 26, 2020

Population growth affects society in many different ways. Some of those impacts are quite obvious, such as the increase in the size of the labor force or the increase in aggregate demand. That is, more people means more workers and at the same time, more people to consume goods and services. Therefore, as a rule of thumb, a higher population generally results in a higher economic output. However, apart from that, there are a few other economic effects of population growth that are less obvious and more controversial. We will look at three of them in more detail below. Particularly (1) the depletion of natural resources, (2) the dilution of the capital stock, and (3) the promotion of technological progress.

1) Depletion of Natural Resources

According to the famous Economist Thomas Robert Malthus (1766 – 1834), an ever-increasing population eventually outgrows its food supply. Specifically, the Malthusian Theory suggests that the size of the population grows exponentially, while its food supply only increases at a linear rate. If left unchecked, Malthus concluded that this would eventually lead to famines and rising death rates, also known as a Malthusian catastrophe. 

To illustrate this, think of a small village that houses 50 people. The land around the village provides enough food for 100 people. Assume that the size of the population doubles every 20 years, whereas the food supply grows enough to feed an additional 100 people over the same period. This works well for a few generations, i.e., after 20 years, the village is home to 100 people and has enough food for 200 people. However, after 60 years, the population (now 400 people strong) begins to outgrow its food supply, which can sustain exactly 400 people at this point. If the population still continues to grow at the same rate, there won’t be enough food for all the inhabitants anymore, which will cause famines and other hardships.

Fortunately, though, Malthus’ negative forecast turned out to be false. While he correctly predicted that the population grows at an exponential rate, he did not predict that food production would also increase exponentially due to technological progress (fertilizers, pesticides, automation, etc.).

2) Dilution of the Capital Stock

According to several modern economists, a high population growth reduces GDP per worker because the capital stock has to be stretched. That means when the population grows more quickly than the capital stock (e.g., machinery, tools, knowledge), each worker can be equipped with less capital. This, in turn, causes GDP per worker to fall because the workers need this capital to be productive.

To give an example, let’s look at two imaginary countries, Fertiland and Infertiland. Assume that both countries are of the same size, but the population of Fertiland grows at a higher rate than the population of Infertiland. As a result, Fertiland has more school-age children, which places a more substantial burden on the country’s educational system. Schools are overcrowded, and teachers have little to no time to engage with students. By contrast, schools in Infertiland are not working at full capacity yet, and teachers have enough time to focus on individual students. As a result, Infertiland beats Fertiland when it comes to the level of education.

In reality, the dilution of the capital stock primarily affects developing countries. While most developed countries only experience moderate population growth (i.e., about 1 percent annually), the population increases at a rate of about 3 percent per year in many emerging countries. Although that’s not the only reason for developing countries to lag behind, it is generally considered a contributing factor.

3) Promotion of Technological Progress

Finally, some economists argue that rapid population growth benefits technological progress because the availability of human capital increases. That means, the more people there are, the higher the chance that some of those people are incredibly smart and come up with new inventions and innovations which benefit the economy as a whole. There have been several studies that provided support for this hypothesis by analyzing the historical development of isolated societies around the world. In many of those cases, nations with smaller populations did not develop as quickly as their more populated counterparts.

To illustrate this, let’s revisit Fertiland and Infertiland. Let’s say that the population of Fertiland consists of 1 billion people, whereas Infertiland only has 1 million inhabitants. Imagine that, on average, one in a million people is a genius who is capable of coming up with ground-breaking inventions and innovations for society. That means, statistically speaking, Fertiland is home to about 1,000 geniuses, while Infertiland only has 1 genius. As a result, Fertiland has a much higher potential for technological progress.

At first glance, this may seem contradictory to what we have learned above. After all, empirical observations suggest that developed countries see more technological progress than developing countries, despite slower population growth. A possible explanation for this is that in a globalized economy, developing countries usually don’t struggle with technological progress itself, but rather with difficulties applying new technologies developed elsewhere, due to a lack of education, political instability, corruption, brain drain, etc.

Summary

Population growth affects society in many different ways. Some of those impacts are quite obvious, such as the increase in the size of the labor force or the increase in aggregate demand. Apart from that, there are other factors that are less obvious and more controversial. Particularly (1) the depletion of natural resources, (2) the dilution of the capital stock, and (3) the promotion of technological progress. The depletion of natural resources refers to the idea that an ever-increasing population eventually outgrows its food supply. The dilution of the capital stock describes the hypothesis that a high population growth reduces GDP per worker because the capital stock has to be stretched. Finally, the theory of the promotion of technological progress states that rapid population growth benefits technological progress because the availability of human capital increases.