Wars often stimulate the economic activities of supply and demand for services and goods that the military use in war. One of the sectors that are stimulated by war is manufacturing because of the demand for uniforms, weapons, munitions and vehicles. In the same regard, wars bring about opportunity costs (Kroon, 2007). When war-related activities are stimulated, and the military personnel is mobilized, this means the government foregoes the stimulation of other economic activities like the manufacturing of clean energy or even expansion of access to education.
Over the years, government involvement in the war has led to the loss of employment opportunities in approximately three million jobs. This is because the federal spending in war could have been diverted to other economic activities that could have created more employment. In this case, labor intensity is used to measure the total spending that goes to the labor market instead of facilities and equipment. For example, in education, a larger percentage of total spending goes to payment of teachers salaries. When this money is channeled in the military, most of it ends up being used on capital expenditures, other than in paying workers. This in return creates fewer jobs for the same amount of spending.
Salaries paid to the workers in the military are usually higher as compared to other professions like teaching. When wages are lower in one industry, it is easier to employ more workers with the same amount of spending (Kroon, 2007). On average, the compensation in the military is higher, and this means that fewer military jobs are created.
How would a war affect aggregate supply and aggregate demand?
The aggregate demand equation is;
Aggregate Demand (AD) =Net exports + Government Spending + Private Consumption + Private Investment.
This means that the direct effect of war is increased government spending, thus the increase in demand. Nevertheless, if war is funded by increasing the domestic taxes, it means that an increase in government spending will lead to a decrease in the private investment and consumption. This is because the tax rates tax away the private money. The overall result is that any change in the aggregate demand, in this case, is neutral (Krugman, 2013). If the government uses debt to finance the war, this results in clouding of private investments. The long-term effect is the negative AD because of the decrease in private investments which results from the government using up the supply of loanable monies. When the war is over, the clouding out will still be in existence, and this means that the government spending will decrease. The long-term effect of this scenario is a reduction in the AD.
War affects the aggregate supply in a number of ways. The shift in the supply curve can be caused by shifts that arise from labor. One effect of war is that it increases the levels of immigration, and this means that a country that is involved in war will lose its labor force. This leads to a negative shift in the aggregate supply (Krugman, 2013). The shift can also be caused by the shifts that arise from capital. During the war, a larger percentage of governments spending is used in the purchase of capital equipment such as vehicles and other machinery used in the war. This means that there will be a reduction in the governments spending on human capital like education.
Is Peace good or bad for the economy?
Peace is good for the economy for various reasons. Analyzing the components of Gross Domestic Product during wars shows how the heightened spending in the military affects the micro economy. The noticeable direct consequence that war brings is the increased military budget. Over the years, governments have funded their war using debt (cold war), inflation and taxation. I each of the examples, the burden, is mostly felt by the taxpayers leading to constrained private investments and consumption (Keynes, 2007).
Other effects of war on the economy include higher taxes, budget deficits and inflation caused by the growth that is above the trend. Regardless of how war is financed, the overall effect on the economy is always negative. From this argument, the question is for the periods of cold war and World War II, what would have happened if the war did not take place? If war did not take place, it means that there would have been in governments spending on the military. This means that taxes would have been lowered; there would have been increased private investments and consumption and lower inflation rates. Sometimes it is necessary to fight some wars, but the consequences can be detrimental if the war was avoided. This means that a government ought to look for other options to solve conflicts. This is because the outcomes of starting or being involved in a war can be unpredictable regarding duration, outcome and the overall economic consequences (Keynes, 2007). From this explanation, it is clear that peace is good for the economy of any country.
Keynes, J. M. (2007). The economic consequences of the peace. New York: Skyhorse Pub.
Krugman, P. (2013). Macroeconomics: Canadian edition. Place of publication not identified: Worth Pub.Kroon, G. E. (2007). Barron's macroeconomics the easy way. Hauppauge, N.Y: Barron's Educational Series, Inc.
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