How do natural disasters affect the economy?

Employment

Following a natural disaster, there are three basic changes that can occur as far as employment is concerned. Any change in employment is likely to affect an economy's physical capitol, or quantity of labor.

On the other hand, natural disasters tend to create more jobs than they end. Structural employment can result in fewer jobs than workers. However, with all of the damage repair and services that the public needs, many new jobs are created, especially in construction. This is one way a disaster can ultimately have a positive effect on a community through reducing unemployment.

A decline in GDP

Some people may be employed before and after the disaster, but experience an increase in business following the disaster. This is because the demand for the good or service they supply has increased as a result of the event. This is especially true for occupations like carpenters, construction workers, trash removers, and physicians.

Some people may lose their jobs. Perhaps the owner of a small business is financially unable to rebuild their business after it was destroyed by a disaster.

GDP, or Gross Domestic Product, is often used to measure the overall growth of an economy. It takes into account products that are bought and sold. GDP is a net concept, so while consumers would spend money for repairs following a disaster, they spend less on other goods and services. As a result the GDP tends to decline.

The Reallocation of Public funds

Infrastructure Changes

Following a natural disaster, it is one of the government's duties to oversee the safety of citizens and repairs to the community. As a result, public funds are reallocated in order to provide reconstruction and repairs.

Every natural disaster has the potential to cause a large amount of damage. In highly populated areas, this is particularly likely. While this causes a short term financial setback in that new facilities must be constructed, it ultimately creates a positive result. The destruction of older buildings and factories leads to the creation of newer, more effective facilities. This can lead to an increase in production and efficiency, thus resulting in a greater marginal revenue through the addition of multiple units to sell.

Long Term Effects

Short Term Effects

In relation to this idea, consider the law of supply and the law of demand. In some communities, the demand for a product is greater than what local businesses can supply. As a result, people go elsewhere to buy that product. However, if this business is unfortunate enough to be destroyed by a natural disaster, they can begin new construction in order to buid a facility that meets the community's needs. Consequently, consumers will be able to buy that product locally, because the supply will be in equilibrium with the demand. Not only will this benefit both the producer and the consumer, but it will bring money into the local community's economy.

Natural disasters can leave lasting effects on both the environment and the economy. By altering once part of the economy, many other areas experience change. This is why some effects cause long term changes, some for the better and others for the worse.

Immediately following a natural disaster, the most shocking observances are the death toll and changes to the actual landscape. The economy, however, also experiences changes in order to adapt to the circumstances. Both positive and negative changes result.

Decline in Economic Activity

Population Changes

Public revenue is affected following a natural disaster, causing lower amounts of economic activity. Consequently, there is a decline in imports and exports. This reduces indirect tax revenue.

During a natural disaster, a population change is possible depending on the number of people killed. However, the significant change occurs after the incident. As peoples' homes are destroyed, they often move away for a fresh start. Perhaps they want to live in a region less prone to natural disasters. Thus, emigration decreases the population of an area.

Common Natural Disasters

Consider New Orleans following hurricane Katrina. Its economy was based on service and tourism, but this could not be maintained following the disaster. With 80% of the city flooded it was impossible to maintain a normal amount of economic activity. As a result the economy suffered.

After hurricane Katrina hit New Orleans in 2005, many citizens lost their homes and chose to live elsewhere. 6 years following the event, the population was 21% lower.

Consider the same small island nation of Fiji, mentioned earlier. If a strong hurricane or tsunami were to hit this area, just about the entire population would be affected. If numerous people were killed, the population of the island could be impacted significantly.

Any drastic change in population leads to economic change. It affects the amount of money being circulated around a certain area, as well as the number of producers and consumers.

Increase in spending

Natural disasters cause an increase in spending because there are many goods and services that consumers not only want, but need. This may include support and medical aid in response to injuries that result from the disaster. Normally producers and consumers have competing interests. A disaster creates an incentive, or a stimulus that encourages people to buy certain products.

Hurricanes

Wildfires

Conclusion

Earthquakes

Blizzards

Droughts

Mudslides

Floods

Natural Disasters

Tornadoes

Clearly, natural disasters have a major impact on the economy. In the short term many economic activities fluctuate, including GDP, the allocation of public funds, and spending. In the long term changes are seen in employment, infrastructure, and population. Therefore, it can be concluded that the consequences of natural disasters are deeper than the superficial damage. While one would never hope for a disaster to occur, there are some positive economic outcomes, as seen in an increase in employment and production. Delving into the economics of disasters reveals how malleable the economy is. While it is essentially intangible, almost all people feel its effects.

Natural disasters occur across the globe with differing strengths and consequences. The World Bank reports that these incidents have increased by 30% since the 1960s.

Bibliography

• Boykoff, Pamela. "Do Natural Disasters Boost Economic Growth?" Business 360 RSS. CNN, 14 July 2011. Web. <http://business.blogs.cnn.com/2011/07/14/do-natural-disasters-boost-economic-growth/>.
• Relief, Val. "The Impact a Disaster Has on the Economy of a Country." Relief.org. Grassroots.org, n.d. Web. <http://www.relief.org/the-impact-a-disaster-has-on-the-economy-of-a-country/>.
• Bennett, Drake. "Do Natural Disasters Stimulate Economic Growth?" The New York Times. The New York Times, 8 July 2008. Web. <http://www.nytimes.com/2008/07/08/business/worldbusiness/08iht-disasters.4.14335899.html?pagewanted=all&_r=0>.
• Kliesen, Kevin L. "The Economics of Natural Disasters." Federal Reserve Bank of St. Lewis, Apr. 1994. Web. <http://www.stlouisfed.org/publications/re/articles/?id=1880>.

This graph shows the increasing trend in reported natural disasters from 1900-2009. The purpose of this project is to explore how these disasters affect the economy.

photo from - http://www.emdat.be/natural-disasters-trends

It is important to consider the fact that smaller or less developed nations will be affected differently than large nations, simply because they have a smaller economy, and in some cases less space. For example, Fiji is a small island nation. Typically, if a hurricane hits Fiji the entire nation is impacted, and thus the economy shows more change. This is because Fiji has a smaller household, or number of individuals within its society.

How do natural disasters affect the economy?

Kristen Grube

AEB2014 Final Project