Aging, transitional dynamics, and gains from trade

We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. We obtain two main results. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky.