Overlapping Generations Model - Basic OLG Model

Basic OLG Model

The most basic OLG model has the following characteristics:

  • Individuals live for two periods; in the first period of life, they are referred to as the Young. In the second period of life, they are referred to as the Old.
  • A number of individuals is born in every period.Ntt denotes individuals born in period t.
  • Nt-1t denotes number of old people in period t. Since the economy begins in period 1. In period 1, there is a group of people who are already old. They are referred to as the initial old. They can be denoted as N0 .
  • The size of the initial old generation is normalized to 1 i.e. N 00 = 1.
  • People do not die early, N tt = N tt+1.
  • Population grows at a constant rate n:
  • There is only one good in this economy, and it cannot endure for more than one period.
  • Each individual receives a fixed endowment of this good at birth. This endowment is denoted as y. This endowment of goods can also be thought of as an endowment of labor that the individual uses to work and create a real income equal to the value of good y produced. Under this framework, individuals only work during the young phase of their life.
  • Preferences over consumption streams are given by

Read more about this topic:  Overlapping Generations Model

Famous quotes containing the words basic and/or model:

    “Not many appreciate the ultimate power and potential usefulness of basic knowledge accumulated by obscure, unseen investigators who, in a lifetime of intensive study, may never see any practical use for their findings but who go on seeking answers to the unknown without thought of financial or practical gain.”
    —Eugenie Clark (b. 1922)

    “...that absolutely everything beloved and cherished of the bourgeoisie, the conservative, the cowardly, and the impotent—the State, family life, secular art and science—was consciously or unconsciously hostile to the religious idea, to the Church, whose innate tendency and permanent aim was the dissolution of all existing worldly orders, and the reconstitution of society after the model of the ideal, the communistic City of God.”
    —Thomas Mann (1875–1955)