Estimating the economic costs of conflict: An examination of the two-gap estimation model for the case of Nicaragua

Sabrina DiAddario

Oxford Development Studies, 1997, vol. 25, issue 1, 123-141

Abstract: A substantial part of the economic cost of conflict arises from the reduction in potential output consequent upon the sharp decline of foreign exchange availability caused by the destruction of export capacity and the interruption of trade channels. This paper examines the “two-gap” model used by the United Nations to measure the GDP loss from war in the case of Nicaragua. The theoretical limitations of this model are discussed, and the implausibility of the assumptions as to fixed import and consumption coefficients identified. Careful econometric estimation reveals that there is in fact a structural break in the consumption function, the use of which results in a more robust method for estimating the economic cost of conflict, and more figures for the case of Nicaragua.

Date: 1997
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DOI: 10.1080/13600819708424125

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