Chapter 40 The Cost of War Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

40-2 Chapter Outline OPPORTUNITY COST PRESENT VALUE AND THE VALUE OF HUMAN LIFE ECONOMIC AND ACCOUNTING COST HOW GDP WAS AFFECTED ENVIRONMENTAL AND CULTURAL COSTS

40-3 You Are Here

40-4 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

40-5 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.

40-6 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

40-7 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

40-8 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.

40-9 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)

40-10 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

40-11 Positive Impacts on GDP Positive Impacts –Increased government spending

40-12 Environmental Costs Oil Fires Depleted Uranium Armor on the sand