Natural Disasters and Their Effect on the Macro Economy

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Natural Disasters can have both a positive and negative impact on the local, national and the global economy. However it is rare, but not out of the question, to see the positive impact it may have on an economy. For instance, when disaster struck in Haiti from the 7.3 magnitude earthquake in 2010, between 200,000-250,000 people were killed. That is 2 percent of the total Haitian population of only 10 million. Comparatively New York City alone totals nearly as much as the entire population of Haiti with about 8.2 million people (U.S. Census Bureau, 2010). The Inter-American Development Bank estimated that it cost 8.5 billion dollars in damage to Haiti's economy. The earthquake caused the country's gross domestic product (GDP) to contract 5.1 percent that year. Considering that Haiti’s economy only produced 12 billion dollars in 2008, 8.5 billion dollars is a huge deficit to the overall production and functionality of their economic and social growth. That is less than a tenth of a percent of U.S. GDP of 14 trillion dollars, but Haiti’s GDP per capita is only 1,300 dollars compared to over 40,000 dollars per person in the U.S. ( With all of this said, Haiti brought in nearly fifteen billion dollars through donations. So although there was catastrophic and disastrous losses to both the social and economic stimulus, on donations alone, Haiti was able to receive three billion dollars more than even their best year in 2008 with only twelve billion dollars. Proposing a theoretical situation, if an earthquake destroyed capital stock but left the labor force intact, the real rental price of capital would increase. The real rental price equals the marginal product of capital and having less capital stock available raises the marginal product of capital and therefore, raises its real rental price. This situation would also make the labor force larger in relation to available capital. Since this would lead to a declining marginal product of labor as workers have less equipment to use, the real wage would decrease as well. Due to rising world population, climate change, and environmental degradation, natural disasters are increasing in frequency. They are also becoming costlier and deadlier, according to Swiss Re, a reinsurance company; the U.S. suffered a cost of 145 billion dollars in 2004, which was up from 65 billion dollars in 2003. In 2009, natural disasters cost insurers about 110 billion dollars. In 2010, the cost was double that, at 218 billion dollars. So as you can see, in the past 10 years there have been jumps nearly doubling the cost that a country suffers to natural disasters from year to year. According to the World Bank, there are several factors that affect a country’s vulnerability to natural disasters: its geographic size, the type of disaster, the strength and structure of its economy, and prevailing socioeconomic conditions. In a globalized economy, all these factors, as well as others, also play into how the world’s finances will be affected. (SKOUFIAS, 2003). A common belief is that short-term economic hits after a disaster, even those as large as this year’s earthquake and tsunami in Japan or Hurricane Katrina in the U.S. in 2005 are more than offset by the reconstruction boom that follows. However this is only in countries that are large and rich enough to have short-term stabilization to the immediate economic hit. The nature of the disaster and the size of the victim count in an economy are key when determining whether or not natural disasters have a negative impact on macroeconomic growth. (SKOUFIAS, 2003). So in a country such as Haiti and their disastrous earthquake, although a lot of money was pumped into the economy in order to help in the rebuilding, that does not do much when they are still in need of the proper man power that can produce new development or ideas for rebuilding the structures that were destroyed. Incidences of natural disasters have increased by 30 percent since the...
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