This paper seeks to draw macroeconomic lessons from Demographers who had forecasted since the 1950s about how population growth within New Zealand (NZ) will gradually rise at a decreasing rate by the twenty-first century (Bascand, 2012). The demographic projection results were collected and used as time-series data by Governmental Public Service Departments such as the NZ Treasury, Ministry of Works, and Statistics NZ. To further view these projections, we must find the short-term and long-term factors that affect the slowdown in NZ population growth by using the ‘Solow Growth Model’ supported by the ‘Cobb-Douglas Production Function’.
The neoclassical model was developed in 1957 by a well-known economist, Robert Solow, and can be used to analyze the overall dynamics of economic growth (Corporate Finance Institute, n.d). It will be used to create an outlook on the changes in the level of output, population, workers, and income in New Zealand. These variables are exhibited through capital (K), labor (L), savings (S), investments (I), and consumption (C), which are displayed in the Solow model (Appendix A) and Cobb-Douglas equation (Appendix B).
The aggregate production function was developed by Charles Cobb and Paul Douglas and used extensively in economic models to show the relationship between the level of output (GDP), capital, and labor (Lumen, n.d.). Therefore, the equation can be used to further explain in mathematical terms these variables to determine the initial steady-state and what might happen to the New Zealand economy that would follow the decline in population growth rate.
While the analysis is conducted on the New Zealand growth rate on population, what must be taken into consideration are the “factors of production” in the Solow Model (Marginal Revolution University, 2016).
These factors would include Human Capital, Physical Capital, Organisations, and technological knowledge. It is importantly noted that what created these factors are institutions that comprise property rights, political stability, government, and competitive & open markets. With these institutions, it can create incentives to produce the factors of production (Marginal Revolution University, 2016).
Generally, by using the model and production function in the context of predicting the growth rate of the population and economy, real current events such as the COVID-19 pandemic or poverty statistics will be analyzed to provide further insight into this projection. It will also be used to assess how the events impacted physical & human capital and monetary policies set by New Zealand Government.
In the event of the COVID-19 pandemic that commenced at the beginning of 2020, it was expected that the large shock had heavily impacted the New Zealand economy. As forecasted, the national GDP would drop and the rate of unemployment will rise (Graham-McLay, 2020). By observing the macroeconomic effects of this event, the Solow model was used to project and predict the potential changes that may occur.
According to Appendix C, the destruction of capital caused by the pandemic can be labeled as a shock factor that would then decrease the total output and capital per worker marked by Y* down to Y1 and K* down to K1. The contributed factors will then move the points to negatively diverge from the steady-state position. This would then set a new equilibrium and show that the changes between output per worker and investment per person have dropped significantly.
It also showed the short-term negative impact on total welfare, as shown that there is less consumption due to the event, where consumers are buying much less and are saving more. This is also proven due to the implemented alert system, which New Zealand had to transition into a lockdown procedure where citizens must stay indoors and keep a safe social distance from others. The event created a higher level of uncertainty and less purchasing power within the economy as non-essential businesses had to shut down and shopping became limited (Meyer, n.d.).
Furthermore, the short and long-run impacts of growth on population can be demonstrated by the level of output per worker, which is growing at a decreasing rate. As mentioned previously, in the short run once the lockdown was commenced in New Zealand, it created lower levels of physical and human capital. Therefore, any production of an extra unit of capital will make more output which is beneficial for the rapid growth of the total economy in the short run.
In the long run, once New Zealand returns to Alert System Level 1, the accelerated growth will improve total welfare as consumption surges with the change of output per person and savings will rise (Appendix B). It would indicate that the standard of living within NZ will improve in the long run while consumers are stimulated with possible cash payouts (Edmunds, 2020). This will allow consumers to gain the level of confidence and certainty to spend in the money market once again. However, it will eventually reach the break-even point, which will create a diminishing return where capital depreciates and will slow down growth once again and reach the steady-state equilibrium. This is due to the investment that will be used to make up for depreciation to repair and replace existing capital (Marginal Revolution University, 2016).