Question

Question is above picture... The "baby boomers" are starting to retire. They are the largest population group in the country, larger than Gen X or millennials. How will their retirement over the next 15 years affect the economy as a whole? Think of multiple stocks and flows in the circular flow model in Chapter 15, Figure 15.5. Also think of the 3 most commonly used measures of the economy as a whole: GDP, prices and unemployment.

The "baby boomers" are starting to retire. They are the largest population group in the country, larger than Gen X or millennials. How will their retirement over the next 15 years affect the economy as a whole? Think of multiple stocks and flows in the circular flow model in Chapter 15, Figure 15.5. Also think of the 3 most commonly used measures of the economy as a whole: GDP, prices and unemployment. Figure 15.5 Spending in the Circular Flow Model GDP equals the sum of production by firms of goods and services for personal consumption (1), private investment (2), government purchases (3), and net exports (4). The circular flow model shows these flows and shows that the production of goods and services generates factor incomes (5) to households. Private investment () Personal consumption (1) Households Firms Government purchases Factor incomes (5) Exports Rest of the world Government agencies

Answer 1

Starting from unemployment, it is important to note that the labor force participation rate in the United States was 66.4% in January 2007. This has declined to 62.8% as of April 2019. One of the key reasons for decline in labor force participation rate is an ageing population. While this reduces the unemployment rate, it is certainly not healthy for the economy as the number of dependents in the household increase. A second related point to note is that when dependents in the household increase, there is higher burden on the working population. This negatively impacts discretionary consumption spending in the economy.

From the GDP perspective, it is important to note that healthcare spending is nearly 20% of GDP. This can be classified as "bad GDP" even as it triggers higher GDP growth in the economy. Going forward, with an ageing population, healthcare spending is likely to increase as a percentage of GDP. This will translate into GDP growth, but is not "good GDP" as is comes from increased heath problems in the economy.

Another critical aspect to note is increase in medicare, medicaid and social security spending. This is related to the government spending component of GDP. Even with economic recovery, the government budget deficits have been widening. This is as a result of higher spending of medicare, medicaid and social security. The problem is that government debt is already at $22 trillion and with sustained deficits, debt will continue to growth. This will cause crowding out of private sector investments from the economy as interest rates trend higher. Lower spending from the private sector will result in weak economic growth as investment spending is also a key component of GDP growth.

Therefore, considering an ageing population, consumption spending in the economy will be driven by healthcare spending. The government spending will potentially be driven by medicare and medicaid spending. At the same time, investment spending will suffer as government debt swells.