The impact of the oil crisis associated with the Persian Gulf conflict on the United States

Abstract

This paper analyzes the effects of the Persian Gulf conflict on the level of economic activity, employment and inflation in the United States. Impacts on other countries are not examined in this study. Many of the impacts are difficult to quantify objectively. One factor that can be subjected to analysis is the increase in US government expenditures associated with Operations Desert Shield and Desert Storm. The analytical results of the investigation suggest that the method of financing the increase does make a difference in how the US economy is affected. In two of the three cases considered (i.e. deficit financing and 80% financing by coalition partners), output, personal consumption expenditures, and disposable income increase, but these increases are partly associated with higher prices (i.e. inflation). In the third case (i.e. tax-offset scenario), output, personal consumption expenditures, and disposable income decline, but prices actually fall. Moreover, the magnitudes of the changes are directly proportional to the size of the expenditure increase.