Coronavirus Outbreak: How The Cost Of An Epidemic Is Assessed

Airline fares have fallen. Tourism industry has suffered. Travel bans have been imposed. Freedom of movements has been restricted. What does this all mean for the economy. How do economists assess cost of an epidemic? In what way does the coronavirus outbreak affect the economy?

Cost of an Epidemic
  • Governments ask people to avoid unnecessary travel.
  • Affected countries generally ask people to remain home or work from home. Affected countries also see the decline of tourists. All these measures lead to a reduction in economic activities.
  • The World Bank’s 2008 report (published after the SARS outbreak of 2004) said that about 60% of all economic loss during a flu outbreak will be as a consequence of “panicky efforts of individuals to avoid being affected”.
  • Thanks to globalization, supply chains worldwide are interconnected. For example, India’s pharmaceutical industry depends a great deal on import from raw materials from China. Coronavirus outbreak in that country has disrupted this supply chain. This has forced Indian pharmaceutical companies to either completely stop manufacturing, or manufacture at a smaller scale. Manufacturers have to look for alternative supply chain. This demands more time and money.
  • Poor countries with little state capacity report higher mortality and higher GDP losses even if they step up spending during outbreaks.
UPSC Mains Study Material
Cost of An Epidemic: Different Models

Stochastic Model: In this model economists take into account the random nature of the virus outbreak. They arrive at a monetary value of the outbreak by calculating probable damages. They assess severity of outbreak at different levels. In this model, duration of an outbreak is also taken into account.

Advanced Model: This model is more sophisticated. in this model techniques like use of dynamic macroeconomic and microeconomic models are employed. This model also analyses interlinked supply chains. They gather information of supply at various level of production in multiple countries.

Wage fluctuations, behavioural changes of consumers, fiscal responses to outbreaks are also assessed.

Since the advanced model requires more data, its assessment is more accurate. Unit of observation is the biggest differentiator between these two models. The advanced or dynamic model assesses losses incurred by each sector and then calculate the impact felt by each country. Hence, it reflects the inclusive cost of an epidemic.