South-Western College Publishing - Economics  
How Much Will the Iraq War Cost the Iraqis?
Topic Scarcity, Choice and Opportunity Cost ; Production and Costs
Key Words Iraq, US, war, cost.
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Reference ID: A153148335

News Story U.S. economists have studied the cost of the Iraq war to the U.S. But to this point no one has considered the impact of the war on Iraq itself. The numbers, even as a first pass, don't look good

An economist at the University of Birmingham in Britain considered the full costs of the war in Iraq over the period 2000-05 (although the war didn't begin until 2003). The obvious costs included the cost of military and security operations, etc. The study also attempted to examine costs in the loss of human life, but that ultimately was unclear: Some sources estimate that Iraqis are dying at a rate of 100 per day, while other sources peg that number at a much higher 500 people per day. That's 2% of Iraq's total population lost since the war began in March 2003.

Then he considers the less obvious costs to the Iraqi economy: To do this, the economist needed to consider what the Iraqi economy would look like today had the war never happened. He assumed that the bulk of economic growth would come, obviously, from oil revenues, and that said growth would have been rapid. His calculations suggest that in the absence of the war, the Iraqi economy would have grown 12% per year, adjusted for inflation. In 2005, Iraq's economy would have been worth $61 billion.

Since 2000, the Iraqi economy has grown at a 3.1% rate, but if foreign aid is subtracted out, the economy has actually contracted by 0.2% per year. Its current economy is worth $37 billion--a $24 billion reduction from the $61 billion that it would have been in the absence of the war. That's 40% of its total value. Studies of the war peg the U.S. costs at only about 1% of its economy for that five-year period.

Is the Iraq war worth the costs? We really can't tell as yet. Iraq stands to benefit greatly if stability ensues; its infrastructure can be rebuilt; it can increase its oil production and generate additional revenues, and Iraq can increase trade with the rest of the world. It could have done this under the Hussein regime, but it stands to reason that political stability with a less polarizing person running the government could promote increased economic growth and better trade relations with the rest of the world.

Granted, this study is fraught with assumptions and estimates, and even the researcher himself acknowledges the problems associated with some of the estimates. But it's the first of many likely studies, and is at least enough to give any reader pause.

Discussion Questions:
1. Why do you think foreign aid was subtracted from the researcher's calculation of the cost of the war, if Iraq was receiving all of that aid over this period?
2. Why do you think that the costs to the U.S. and the costs to Iraq vary so widely if we are talking about an identical event?
3. What kinds of benefits do you think this war has for Iraq? How would you measure those?
Multiple Choice/True False Questions:
1. The loss in value to the Iraqi economy can best be described as a(n)
  1. Variable cost
  2. Fixed cost
  3. Sunk cost
  4. Opportunity cost
2. What does the war in Iraq do to the location of its production possibility frontier?
  1. Shift it out
  2. Shift it inward
  3. It doesn't move; the economy simply moves along the curve
  4. It doesn't move; the economy simply moves to a point below the curve
3. True/False. This study implies that Iraq is worse off in the long run because of the war.
Source Bernasek, Anna. "An Early Calculation of Iraq's Cost of War." The New York Times. October 22, 2006.
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