Virginia Tech study estimates economic impact of coronavirus

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A study by two Virginia Tech economists suggests the lockdown of Hubei province in China to try to contain the spread of coronavirus reduced global GDP 1 percent.

China’s GDP, meanwhile, took a 4 percent hit, and what does that means in terms of actual dollars?

The impact in China is $40 billion. The global economic impact is estimated at $70 billion.

By the way, this is a per-month figure.

“The world is more connected now; some disruption in one place has consequences elsewhere,” said Kwok Ping ‘Byron’ Tsang, an associate professor in the Department of Economics at Virginia Tech, and a member of the Hong Kong Institute of Asia-Pacific Studies’ Economic Research Centre. The lockdown of Hubei not only affects the province itself, but you also have Hubei people who just cannot go back to other provinces where they work. The rest of the country is affected. Likewise, the decrease in production in China affects all other countries, which are directly or indirectly relying on goods coming out of China.”

This is what happens when people stay home from work as recommended, when conferences are shuttered, when people cancel flights for business trips and vacations.

“With the disease spreading across the world and increasingly looking like a pandemic, we will see more countries following China’s footstep and restrict activities to different extents,” said Shaowen Luo, an assistant professor in the Department of Economics whose research focuses on monetary policy and economics of networks and international finance. “Schools may close, workers may be told to work from home, and travels may be restricted. Our study will give us a sense of the economic costs of such measures, both for the domestic economy and the rest of the world.”

To get their results, Luo and Tsang combined ideas from the economics of networks with various sources of empirical data and estimates of economic impacts.

“The modern economy is connected. Locking down Hubei does not mean that we are losing the output of that province only, as Hubei is related to all other provinces in a complex web of input-output relationships,” Luo said. “Likewise, it is not only loss of output in China, as, despite all the fuss with the trade disputes, China is still closely connected to other countries in another complex web of trade linkages. The economics of networks gives us the appropriate tool to handle all such complexities.”

Luo and Tsang call their findings on the lockdown “conservative estimates,” as they considered labor-loss-triggered output reduction due to the lockdown of just one region.

Hubei, it should be noted, is a commuters’ city with people traveling to work. This creates a ripple-effect in surrounding regions where travel is restricted.

In their modeling, the economist assumed a high degree of substitutability between inputs. In the real world, Luo said, given such short notice, it may not be easy for firms to switch to a different production method that uses less labor. Also, to keep the analysis manageable, Luo and Tsang considered the lockdown of one province — Hubei — and ignored similar policies that are adopted elsewhere.

Moreover, to keep the study simple and clean, they didn’t incorporate demand-side disruptions. Therefore, actual GDP losses will likely be far greater, they said.

Story by Chris Graham

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