Transcript Chap040

Chapter 40
The Cost of War
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• OPPORTUNITY COST
• PRESENT VALUE AND THE VALUE
OF HUMAN LIFE
• ECONOMIC AND ACCOUNTING
COST
• HOW GDP WAS AFFECTED
• ENVIRONMENTAL AND
CULTURAL COSTS
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You Are Here
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Opportunity Cost and War
• Opportunity cost: is the “forgone
alternative of the choice made.”
• War is usually a choice
– Other than World War II the wars fought by
the U.S. since 1900 (Korea, Vietnam, Grenada,
Panama, Kuwait, Bosnia, and Iraq) have been by
choice
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Applying Opportunity Cost
to the War in Iraq
• Service personnel in the Gulf
– 250,000 leading up to the war
– 150,000 additional troops deployed during the invasion
– 150,000 occupation troops through 2007
• The opportunity cost of these deployments include
– What they would have accomplished in their home bases
– What reservists would have accomplished in the private
sector
– The increased cost of equipping and feeding troops when
deployed
– Their unavailability to respond to other crises (N. Korea and
N. Africa were problematic at various times during the war
and occupation)
– The effect on deployed families.
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Valuing the
Lives Lost in War
• Economists are called upon to estimate the
value of human lives lost in wrongful death
suits
• These estimates are typically based on
present value calculations of earnings
• Wrongful death compensation amounts
vary but are usually in the $500,000 to $2
million range
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Economic vs Accounting Cost
• Accounting costs : costs that must be
explicitly paid.
– In war these costs include
• Personnel, Equipment, Munitions, Supplies
– But ignore
• Lost production in the private sector by reservists
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Economic Costs
• Economic costs : all costs of a business: those that must
be paid as well as those incurred in the form of forgone
opportunities.
– The portion of personnel and supply costs that would
have been spent anyway is not an economic cost of
the war.
• Identifying which costs are economic and which are
accounting depends on the course of the war.
– Had the occupation been much shorter, less
hazardous, etc. the accounting and economic cost may
have been small.
– Had the war gone very badly or if the occupation
becomes untenable the accounting and economic
costs could have been (be) substantially higher.
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Sample Costs
(Are they Economic?)
• Personnel
– Salaries (depends on the opportunity cost)
– imminent danger/hostile fire pay and “family separation
allowance” (clearly economic)
– Reservists (economic)
• Food (only the marginal increase over costs of
feeding on bases)
• Supplies (only the marginal increase over supplying
on bases)
• Munitions (depends on whether they are replaced)
• Transportation (economic)
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Negative Impacts on GDP
• Negative Impacts
– Higher Uncertainty led to lower consumer
confidence in early 2003
– Higher world oil prices
– Loss of private production of reservists
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Positive Impacts on GDP
• Positive Impacts
– Increased government spending
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Environmental Costs
• Oil Fires
• Depleted Uranium
• Armor on the sand
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