In population economics, a sudden and sharp decrease in the birth rate of a country is most likely, other things remaining the same, to have which impact on the economy over time?

Introduction / Context:
Demographic changes, such as changes in the birth rate, can have important effects on economic variables like per capita income, savings, and investment. A sudden drop in birth rates reduces the growth of population and alters the age structure over time. This question asks you to identify the most likely impact, in general economic theory, of a sharp decrease in birth rate on a country economy, assuming other factors remain broadly unchanged.

Given Data / Assumptions:

• There is a sudden and significant decrease in the birth rate.
• Other major economic factors such as total output and technology are assumed to stay the same in the short run.
• We consider long run trends rather than immediate, short term shocks.
• The options include changes in per capita income, investment, savings, loan requests, and labour productivity.

Concept / Approach:
Per capita income is defined as national income divided by the population. If the total output or income of the country grows at a given rate, but population growth slows down due to a reduced birth rate, then income per person is likely to increase faster than before. This is sometimes referred to as a demographic dividend, where a lower dependency ratio and a higher share of working age population can raise per capita income and living standards. Direct, immediate jumps in investment or savings are less certain and depend on many other variables, so they are not the most straightforward expected effect.

Step-by-Step Solution:
Step 1: Recognise that a lower birth rate means slower population growth in future years.Step 2: If total national income grows at a moderate or constant rate, but population grows more slowly, the ratio of income to population (per capita income) tends to rise.Step 3: This effect arises because the same or slightly higher output is shared among fewer additional people, leading to higher average income per person.Step 4: Over time, a lower birth rate also reduces the proportion of dependants (children) in the population, which can allow more resources to be invested in health, education, and capital formation, further supporting higher per capita income.Step 5: While investment and savings may adjust in response to demographic trends, the direction and magnitude of these changes are less direct and depend on policy, behaviour, and expectations.Step 6: There is no clear reason to expect a sudden surge in loan requests due solely to a fall in birth rate.Step 7: Therefore, the most logical and widely accepted outcome is an increase in per capita income over time.

Verification / Alternative check:
Empirical evidence from countries that have experienced fertility declines shows that, when combined with appropriate policies, lower birth rates can contribute to higher per capita income. Many East Asian economies benefited from a demographic dividend when falling birth rates reduced the dependency ratio and a larger share of the population entered the workforce. While such outcomes are not automatic and require supportive economic conditions, the basic arithmetic of per capita income still holds: slower population growth, with steady or rising output, allows average income per person to rise.

Why Other Options Are Wrong:
An immediate increase in investment expenditure: Investment decisions depend on expected demand, interest rates, and policy; there is no guarantee of an immediate rise solely due to lower birth rates.

A permanent increase in household savings rate: Savings behaviour is influenced by income, preferences, social security systems, and culture; a change in birth rate alone does not guarantee a permanent rise in savings.

A surge in loan requests from households: There is no direct theoretical link between a sudden fall in birth rate and an increase in household borrowing.

A fall in labour productivity in the long run: Lower birth rates do not automatically reduce productivity; in fact, with fewer dependants, more resources can be invested per worker, potentially increasing productivity.

Common Pitfalls:
Some learners may think that fewer births always mean fewer workers and therefore lower output, ignoring the role of per capita measures. Others may focus on savings or investment without considering that these are influenced by many factors beyond demography. The key is to distinguish between total output and output per person. When answering exam questions, remember that per capita income is sensitive to population growth, and lower population growth generally supports higher per capita income, all else being equal.

Final Answer:
A sudden decrease in birth rate is most likely to lead, over time, to an increase in per capita income.