Economic impact of war - Economics Help (2023)

Putting aside the very real human cost, war has also serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity.

From some perspectives, war can appear to be beneficial in terms of creating demand, employment, innovation and profits for business (especially when the war occurs in other countries.) However, when we talk about the ‘economic benefits’ of war we must be aware of the ‘broken window fallacy‘ – when we spend money on war, this creates demand, but also it represents a huge opportunity cost – rather than building bombs and rebuilding destroyed towns, we could have used this money to improve education or health care. For example, the opportunity cost of the Iraq war was estimated at $860 billion by end of 2009 (source: NY Times)

War and inflation

In many circumstances, war can lead to inflation – which leads to loss of people’s savings, rise in uncertainty and loss of confidence in the financial system. For example, in the US civil war, the Confederacy struggled financially to meet the cost of the war. Therefore, they started printing money to pay soldiers’ salaries. But, as they printed money, the value of money soon declined. High inflation hits middle-income savers the most as they see the value of their savings wiped out.

During the Second World War, the United States saw a rise in inflation because the economy was running close to full capacity, the high levels of government spending and shortage of workers saw inflationary pressures. During war, the economy can also experience cost-push inflation due to shortages of goods and services and rising price of raw materials like oil. (Interestingly inflation in the Second World War was limited by price controls and rationning)

If a country is devastated by war and the capacity to produce goods is sharply reduced, it can create the circumstances of hyperinflation as governments desperately print money to try and deal with the lack of goods. For example, with a devastated economy, in 1946, Hungary and Austria experienced the highest rates of hyperinflation on record.

War and oil prices

War can often lead to higher prices of oil because major conflict can threaten supplies.

For example, the Gulf war of 1990 led to rising oil prices. Prices rose from $21 a barrel in July to a post-invasion peak of $46 in Mid October. (though prices fell shortly after)

(Video) What Happens To The Economy When A Country Goes To War

The 2022 Russian invasion of Ukraine led to a rise in the price of oil and gas, and this will lead to higher global prices for fuel. As Russia is a major supplier of oil and gas, economic sanctions on Russia in response to the invasion will reduce supply and put upward pressure on gas prices.

War and National debt

During war we often see a rapid rise in public sector debt. The government is willing to borrow a lot more than usual because – there is patriotic support for the war effort.

Both the First and Second World Wars were very costly for the UK. In both cases, the national debt rose very sharply. In the post-war period, debt continued to rise due to reconstruction and the creation of the welfare state.

UK national debt rose to 150% at the end of World War Two – but then rose to 240% by the early 1950s.

The UK relied on loans from the US during the Second World War and took many decades to pay them off.

For the US, which was not involved for the first two years, the rise in national debt was not as pronounced. The US profited from selling arms and equipment to the UK during the early years (though on generous lend-lease terms)

The financial cost of war

Although war can provide a temporary boost to domestic demand, it is important to bear in mind the cost of war. In particular the opportunity cost of military spending, the human cost of lost lives, the cost of rebuilding after the devastation of war. Also, it depends on the kind of war, how prolonged it was, where and how it is fought. For example, the US fought wars – WWII, Korean War, Vietnam War and it appeared that these wars led to a boost in domestic demand and some manufacturing companies did very well. However, we shouldn’t forget that these wars occurred on territories outside the US. The real devastation took place in Asia and Europe.

See: Cost of War

(Video) How Does War Affect the Global Economy? | Analyze This!

Cost of civil war

Civil war can have a devastating impact on the economic development of countries. Countries experiencing civil war will see a collapse in tourism, foreign investment and domestic investment. It can lead to shorter life-expectancy and lost GDP. A report entitled “Africa’s missing billions” (Oxfam, 2007) estimates the cost of war in Africa has been equal to the amount of international aid. A country like the “Democratic Republic of Congo” has experienced a particularly difficult war, which besides causing the deaths of about 4 million people, has cost it £9bn, or 29% of its gross domestic product.

The report also notes that ongoing war and increased availability of weapons can lead to increase in rates of armed violence and organised crime.

This is an example of the projected loss of GDP for Burundi during the civil war. It is calculated by an estimated pre-war trend of GDP and actual GDP. It shows that a decade of conflict is a major cause of falling GDP.

But, also it is worse than the graph shows because, during the war, a large percentage of GDP is spent on destructive military hardware. The decline in health services and education are likely to be even greater.

The aftermath of War?

War invariably leads to a legacy of debt and an army of demobilised soldiers. After the Second World War, the debt was not a constraint to growth and we had one of the longest periods of economic expansions on record. (Post-War Britain)

However, the aftermath of war is not always so positive. The UK struggled after the end of The Napoleonic war and after the end of the First World War. In the 1920s, the UK struggled with a long period of unemployment – returning soldiers found very poor employment prospects. Yet, after the Second World War, the US and Europe experienced full employment.

The German economy was ravaged by the aftermath of the First World War and the demand for reparation payments. Struggling to meet reparation payments, Germany resorted to printing money – leading to hyperinflation. The discord around the German hyperinflation of the 1920s sowed the seeds for political extremism and future wars.

However, after the Second World War, the Allies didn’t make the same mistake. The US gave generous aid to Western Europe – helping the rebuilding process and leading to the economic miracle of Europe, and Germany in particular.

(Video) Economic costs of war

Psychological costs

It is possible to estimate economic costs of war – cost of military, e.t.c. However, it is harder to estimate the psychological costs of war – the pain of death, suffering, fear and disability. A conflict can leave soldiers and civilians traumatised for the rest of their lives. In recent years, post-traumatic stress syndrome is more widely accepted, but putting a cost on how war negatively affects those involved, is difficult to do.

Economic benefits of wars

War can appear to have potential economic benefits. Though as already stated all these could be achieved without war.

  • Full employment
  • Higher economic growth
  • Increased rate of innovation as the government invests in new technology, e.g. development of radar/jet engine in the Second World War could be used for peaceful purposes.
  • Change in social attitudes. For example, women entering labour market after First World war.

In the 1930s, J.M. Keynes advocated government borrowing and government spending to reduce the mass unemployment of the great depression. However, it was only the onset of the Second World War, where there was the political impetus to pursue sufficient spending. In both UK and US, the economy soon reached full employment – often with shortages in key areas as men joined the army.

Economic impact of war - Economics Help (5)

Graph showing a sharp fall in unemployment at the start of the Second World War.

In fact, one side effect of the First and Second World Wars was the growth in female employment. In 1914-18, women took on jobs, previously the sole reserve of men; this helped to change cultural attitudes and gain women the vote, shortly after the end of the First World War.

Possible unemployment

However, at the end of major wars, there is the danger that returning soldiers may struggle to find employment. After the end of the First World War, there was a major economic slump, and returning soldiers struggled to find jobs that had been replaced during the war.

Economic impact of war - Economics Help (6)

A sharp rise in unemployment after the end of the First World War. The Versailles Treaty which demanded reparations from Germany did not help as it contributed to lower trade

(Video) The myth behind the economic benefits of war

1960s economic boom

In the 1950s and 1960s, the US was involved in major conflicts in Korea, Vietnam and Cambodia. Military spending took an increasing share of GDP and waspartly responsible for strong domestic demand and high rates of economic growth. Companies involved in the manufacture of arms saw a rise in demand and profit.

See: War and the Economy

Economic costs of war in history

There was a time when war could be economically beneficial. In a mercantilist period before substantial trade, a way to improve the economy was to plunder wealth and land from other countries. So for example, the Viking invasions probably increased the wealth of the Viking economy in Scandanavia. Some men were lost in the fighting, but they gained unimaginable wealth, slaves and booty. The wars were quite cheap – there were no armament costs and the army could be self-sufficient. Therefore, the economic benefits of raiding countries could be greater than the economic costs.

However, modern war is very different. Firstly, with all the technology, it is very expensive to run. Modern armies need fuel, munitions and food. Secondly, the world is now much more interconnected with a nation’s wealth increasingly dependent on trade. If a country acts in an illegal war (like Russia 2022) it can face very painful economic sanctions.

A third point is that nationalism is a more potent force since the nineteenth century. Occupying armies are likely to face resistance from locals who refuse to be ruled by a foreign power.

In 1909 British author Norman Angell published a book “The Great Illusion” where he pointed out war in the twentieth century would lead to a net economic cost, whereas in the past, war may lead to economic gain. Of course, this does not mean wars stopped in 1909. Countries can be willing to go to war – for many other reasons. But, at least from an economic perspective, it is usually bad news.

Economic impact of war - Economics Help (7)

Russian invasions led to sharp falls in the Ruble and falls in Russian living standards.

Costs of war – video


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  • Iraq War and US economy


What was the impact of the war on the economy? ›

Public debt and levels of taxation increased during most conflicts; • Consumption as a percent of GDP decreased during most conflicts; • Investment as a percent of GDP decreased during most conflicts; • Inflation increased during or as a direct consequence of these conflicts.

How does war impact the economic development of a country? ›

But the war also greatly compounds a number of preexisting adverse global economic trends, including rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation.

What economic impact did the First World War Short answer? ›

The First World War created a situation where imports from other countries into India started reducing and there was higher demand for goods like rails, cloth, jute bags.

How did the economic effects of the war help bring an end to the fighting? ›

How did the economic effects of the war help bring an end to the fighting? The American economy provided food and supplies to both American soldiers and and allied soldiers. The central powers didn't have the same support for supplies, so the allied forces became stronger.

What was the impact of the war on the US economy quizlet? ›

In 1939 9,500,000 people were unemployed, in 1944 there were only 670,000! General Motors also helped unemployment as they took on 750,000 workers. The USA was the only country to become economically stronger because of WW2. Over 500,000 business were also set up $129,000,000 worth of bonds were sold.

What was the economic impact of World war I quizlet? ›

The war gave the USA high productivity and high employment rates with good wages for workers. Many industries began to apply the principles of mass production during the war, making their factories more efficient. When the war ended, they were in a good position to produce goods quickly and cheaply.

How did World War 1 impact the US economy? ›

The economy was mired in recession in 1914 and war quickly opened up new markets for American manufacturers. In the end, World War I set off a 44-month period of growth for the United States and solidified its power in the world economy.

What war was caused by economics? ›

While World War II was certainly a geopolitical event, some of its underlying causes have been revealed to be economic. Reparations imposed on Germany following WWI left the country poorer, and economic woes caused resentment amongst its population.

What happened to economy after World War? ›

After the war ended, the global economy began to decline. In the United States, 1918–1919 saw a modest economic retreat, but the second part of 1919 saw a mild recovery. A more severe recession hit the United States in 1920 and 1921, when the global economy fell very sharply.

Does war help the US economy? ›

The basic story with spending on a war, or any other military spending, is that it provides a boost to demand in the economy.

How does war save the economy? ›

War is often used as a last ditch effort to prevent deteriorating economic conditions or currency crises, particularly by expanding services and employment in the military, and by simultaneously depopulating segments of the population to free up resources and restore the economic and social order.

What is an example of how the war affected the US economy? ›

The wars have also impacted interest rates charged to borrowers by banks and other creditors. This is the result of war spending financed entirely by debt, which has contributed to a higher ratio of national debt to Gross Domestic Product (GDP), and subsequent rising long-term interest rates.

What happened to the US economy at the end of the war? ›

February to October 1945: End of WWII

But with the surrender of both Germany and Japan in 1945, military contracts were slashed and soldiers started coming home, competing with civilians for jobs. As government spending dried up, the economy dipped into a serious recession with GDP contracting by a whopping 11 percent.

What was the impact of World War on the Russia economic? ›

The various impacts of World War I on the Russian economy were the disintegration of industrial equipment, shortage in labor, and shortage of bread.

Which economic effect was a result of wars such as WWI on the United States? ›

“The primary cause of the Great Depression was the war of 1914-1918,” the former president wrote in his 1952 memoirs. “Without the war there would have been no depression of such dimensions.”

What impact does war have on society? ›

War has a catastrophic effect on the health and well being of nations. Studies have shown that conflict situations cause more mortality and disability than any major disease. War destroys communities and families and often disrupts the development of the social and economic fabric of nations.

How did the First World War help boost the US economy? ›

The total labor force rose from about 40 million in 1916 to 44 million in 1918. This increase allowed the United States to field a large military while still increasing the labor force in the nonfarm private sector from 27.8 million in 1916 to 28.6 million in 1918.

What were the impacts of World War I? ›

The First World War destroyed empires, created numerous new nation-states, encouraged independence movements in Europe's colonies, forced the United States to become a world power and led directly to Soviet communism and the rise of Hitler.

What are examples of economic war? ›

  • 1.1 Crusades.
  • 1.2 American Civil War.
  • 1.3 World War I.
  • 1.4 World War II.

What was the impact of First World War? ›

The First World War destroyed empires, created numerous new nation-states, encouraged independence movements in Europe's colonies, forced the United States to become a world power and led directly to Soviet communism and the rise of Hitler.

What are economic factors of First World War? ›

The miserable wages of the proletariat, the high prices of goods driven up by cartels, tariffs and indirect taxes prevent domestic sales. Therefore, the need for foreign sales markets is constantly growing. The huge accumulation of capital resulting from capitalist exploitation demands profitable investment.

What are positive effects of war? ›

Answer and Explanation: The positive impacts that result from war include the defeat of a problematic government, the correction of injustices, advances in technology and medicine, and a reduction of unemployment.

How did World War affect us? ›

The war production effort brought immense changes to American life. As millions of men and women entered the service and production boomed, unemployment virtually disappeared. The need for labor opened up new opportunities for women and African Americans and other minorities.

What are the after effects of war? ›

Death, injury, sexual violence, malnutrition, illness, and disability are some of the most threatening physical consequences of war, while post-traumatic stress disorder (PTSD), depression, and anxiety are some of the emotional effects.

What caused economic problems after the war? ›

February to October 1945: End of WWII

But with the surrender of both Germany and Japan in 1945, military contracts were slashed and soldiers started coming home, competing with civilians for jobs. As government spending dried up, the economy dipped into a serious recession with GDP contracting by a whopping 11 percent.

Why does the economy do well during war? ›

Producing weapons and munitions is counted positively, while killing people and destroying things is not counted at all. On the one hand, war can increase GDP per capita by reducing unemployment and by shifting people from family formation and other nonmarket activities into wartime production.

What are the social effects of war? ›

War destroys communities and families and often disrupts the development of the social and economic fabric of nations. The effects of war include long-term physical and psychological harm to children and adults, as well as reduction in material and human capital.


1. ECONOMICS AND WAR: The Economic Impact of the War on Terrorism
(Hoover Institution)
2. Is War Good for The Economy?
(Economics Explained)
3. The economic impact of the Russia-Ukraine war
(Yahoo Finance)
4. The true impact of a year of war on Russia's economy | DW Business Special
(DW News)
5. ECONOMICS AND WAR: The Economic Impact of the War on Terrorism
(Hoover Institution)
6. Could Ukraine war plunge the global economy into a new crisis? | Counting the Cost
(Al Jazeera English)


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