From the point of view of aggregate supply, the earthquake caused a decline in the capital stock in the economy (manifested in the damage done to infrastructure, machinery and plants, etc.), as well as a reduction in the size of the population (and consequently, a decline in labor capacity), and the earthquake may have had no effect on technological progress. And these will cause a leftward shift in the aggregate supply curve and a decline in supply capacity in the economy.
Looking at the problem from the point of view of aggregate demand, the demand for exports, as determined by the foreign economy, should be unaffected by the direct impact of the earthquake, and the impact of the earthquake on domestic demand can be examined in two parts, investment and consumption, and viewed in two specific phases:
Investment, in the phase of relief, the normal demand for investment in the affected areas should fall; in the phase of reconstruction, the Due to the need to gradually restore the capital stock of the economy, in addition to the need for normal investment activities, the investment demand in the disaster areas will see a relatively large acceleration and rise;
Consumption, in the disaster relief phase, the normal consumption demand in the disaster areas should be suppressed; however, the government's public **** expenditures (e.g., medical aid, military mobilization, etc.) for the disaster response are growing; the residents in the other areas (including businesses) The economic donations made by residents (including businesses) in other regions should have dampened consumption and investment activity in those regions, but the money and materials donated were almost entirely used for relief in the disaster areas, so the overall impact of the donations on economic activity should have been stimulative. Taken together, the impact on consumption needs to balance the above three factors, and the direction of its impact is not clear. During the reconstruction phase, normal consumption demand in the affected areas should be restored and even accelerated to a certain extent; the government will also invest the necessary public **** funds for the reconstruction; taken together, the impact on consumption during the reconstruction phase should be positive.
Comprehensively analyzing the changes in both supply and demand, it is largely certain that:
Earthquakes can cause inflationary pressures to rise; however, for many industrial commodities, a systematic rise in inflationary pressures will not be observed most of the time because price decisions are global, while the impact of earthquakes is short-term. The increases in the prices of refined oil products and electronic chips caused by Hurricane Katrina in the United States and the Jiji earthquake in Taiwan, China, respectively, are typical examples of inflationary pressures exacerbated by earthquakes, but they are not widespread.
Earthquakes also cause a short-term deceleration in economic and investment activity; however, economic growth and investment soon rebound to higher than normal levels, followed by a gradual return to near trend levels.
Case Study of Disasters Affecting the Economy
Is the above theoretical analysis in line with reality? Let's next examine relevant international experience.
Japan's Hanshin Earthquake
On January 17, 1995, a 7.2 magnitude earthquake struck the Osaka-Kobe area of Japan, with the death toll reaching 5,466 and more than 30,000 injured. The number of people affected by the earthquake reached more than 1.4 million, accounting for about 1.1% of Japan's total population. The GDP of the Hanshin area, the main disaster area, accounted for about 23% of Japan. Officials estimate that the Hanshin quake caused economic losses of 96 billion U.S. dollars, or 1.8 percent of that year's GDP.
Considering the importance of the main disaster areas in Japan's economic activities, the Hanshin earthquake clearly affected the economic activities of the quarter, the first quarter of 1995, Japan's GDP growth and investment growth for the five quarters before and after the lowest number; but in fact, the year's GDP and investment growth compared with the previous year, there is a clear acceleration; and the earthquake seems to be no significant disturbance of CPI inflation.
China Taiwan Jiji Earthquake
September 21, 1999, Taiwan's Nantou County, Jiji area of 7.6 magnitude earthquake, the earthquake caused 2,405 deaths, 11,306 people were injured. The earthquake left 100,000 people homeless, or 0.5 percent of Taiwan's total population. The earthquake struck major developed areas in Taitung, including Taichung and Nantou counties, the center of the earthquake area, which accounted for 7.6 percent of the GDP of Taiwan Province, and the severely affected areas accounted for more than 50 percent of the GDP of Taiwan Province, resulting in losses of 9.2 billion U.S. dollars, accounting for 3.3 percent of the GDP.
Like the earthquake in Japan, the earthquake in Jiji, Taiwan, China, had a significant impact on Taiwan's economic growth, with GDP decelerating sharply by 1.8 percentage points in the current quarter, a significant reduction compared with the two quarters before and after. However, Taiwan's GDP still accelerated by 1.2 percentage points that year. Similarly, the earthquake led to a sharp deceleration in investment growth in that quarter, but a significant rebound soon followed, with investment accelerating by nearly 6 percentage points in 2000 compared with 1999.
On the price level, the earthquake appears to have put some pressure on the level of inflation in the short term, with the CPI rising by 0.04 percentage points in the quarter of the earthquake (the third quarter of 1999) compared with the previous quarter, and continuing to rise by 0.49 percentage points in the second quarter of the post-earthquake period (the fourth quarter of 1999). The shutdown of the Hsinchu Industrial Park as a result of the quake added to the already high global prices of memory and other computer parts.
U.S. Hurricane Katrina
The U.S. was hit by Hurricane Katrina in August 2005, and Alabama, Florida, Louisiana and Minnesota were affected, with the GDP of the affected areas accounting for about 2.2 percent of the U.S. GDP, and the hurricane causing losses of $100 billion, or 0.3 percent of GDP, and a reduction of 400,000 jobs.
The U.S. hurricanes hit a low percentage of the local economy of the country, so the hurricanes have no significant impact on GDP growth, hurricanes in the season and post-disaster reconstruction of the national investment growth has no significant impact.
But the hurricane attack led to high crude oil prices and may push up the level of inflation in the current period. The affected Gulf Coast region is a major crude oil production and refining area in the United States. According to the U.S. oil companies and the Department of Energy report, the hurricane led to refining volume of about 2.3 million barrels of crude oil refining capacity closure or production cuts, accounting for all of the U.S. production capacity of 10%; and led to the U.S. crude oil production cuts of nearly a quarter. As a result of this impact, in August of that year, the already high price of crude oil rose sharply, with the price of West Texas light crude oil rising from $58 to $65. This affected inflation to some extent, leading to a 0.9 percentage point rise in the year-on-year CPI rate in that quarter. But then, as crude oil prices fell back, the CPI increase also fell quarter by quarter.
Estimates of the economic impact of the Wenchuan earthquake
The hardest-hit area of the Wenchuan earthquake includes the cities of Chengdu (Dujiangyan and Pengzhou), Deyang, Mianyang, and Guangyuan, as well as the Tibetan and Qiang Autonomous Prefecture of Aba.At the end of 2006, the population of the hardest-hit area was 14.485 million people, which accounted for 16.6% of the total population of Sichuan province, and 1.0% of the country's population.
According to data released by the National Bureau of Statistics, in 2007, the GDP of Sichuan Province accounted for 4.2% of the country's total, of which the main affected areas, GDP accounted for about 0.7% of the country's ratio; the secondary industry GDP of Sichuan Province accounted for 3.8% of the country's total, of which the secondary industry of the affected areas accounted for about 0.7% of the country's total. The main affected areas in 2006 pork production accounted for only 1.8% of the national ratio, grain production accounted for about 1.0% of the national ratio.
Contrasting the Wenchuan earthquake with the cases described above, it can be seen that the scale of the economy of the Wenchuan earthquake disaster area relative to the national economy is comparable to, or perhaps even lower than, the scale of the Hurricane Katrina disaster area's economy as a percentage of the U.S. economy, and is much smaller than the relative scale of the economy of the earthquake disaster area in the other two cases. Thus, the impact of the Wenchuan earthquake on the total national economy (including short- and medium- to long-term economic and investment growth, etc.) should be quite limited.
As shown in the previous figures, food production in China's major disaster areas accounts for a much smaller proportion of national output than Gulf of Mexico crude oil and refined oil product production accounts for in the United States. Therefore, the Wenchuan earthquake will also have a very limited impact on the national price level.