| War is a
|| Productivity and Growth
| Key Words
||Recovery, Economic Growth, Budget Deficit, Consumer Confidence
| News Story
According to many analysts, war with Iraq is a 90 percent probability
and there is an 80 percent chance it will happen in the next 90 days.
There is a considerable difference between the best- and worst-case scenarios
if the U.S. goes to war with Iraq. The war could end in a matter of days
with little damage to Iraq's oil fields and few casualties. Alternatively,
the U.S. could be involved in a protracted battle with terrorist retaliations
in the U.S. Given the uncertainty over the severity and budgetary impact
of the war, it is not surprising that business firms are reluctant at
this time to commit to major investment projects.
The reluctance of businesses to invest is understandable in light of the
economy's relatively mediocre performance and the war's uncertainties.
Another, related drag, has been the high price of oil. The possibility
of a decrease in Iraqi oil supplies as a consequence of a war has caused
oil prices to slowly increase. Political unrest in Venezuela has recently
pushed oil to over $30 a barrel. Higher oil prices put pressure on certain
industries to raise prices or decrease supplies. Even if the situation
in Venezuela changes, oil prices are likely to stay high until the situation
with Iraq is resolved.
Another question related to a possible war with Iraq is the effect of
a conflict on consumer confidence. A quick victory would likely embolden
consumers and cause a surge in spending. On the other hand, a protracted
action with successful terrorist actions in the U.S. could cause consumers
to retrench. About 41 percent of corporate executive are also worried
about major terrorist attacks in the U.S., according to a survey by TEC
International, a chief executives' trade group. More than two-thirds of
those surveyed feel that a war with Iraq would have a negative effect
on their business.
(Updated April 3, 2003)
Suppose that Iraqi oil shipments are interrupted. How would this
impact the price of oil? Draw an aggregate supply/aggregate demand
diagram and illustrate the impact of higher oil prices on the economy.
|| One important unknown in assessing the impact of a
war on the economy is the effect on consumer confidence. Why is consumer
confidence important to understanding the economy? Show using your
aggregate supply/aggregate demand diagram, the impact of a loss in
consumer confidence on the economy.
||Another factor is the cost of a war with Iraq. In the
Gulf War, U.S. allies footed the bill for the war. Assuming little
aid from other countries. How could the U.S. finance a war? What would
be the impact on the economy?
|| Daniel Altman, "War Uncertainty
Weighs on Economy," The New York Times, January 18, 2003.
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