Virginia Tech economics experts detail Chinese and worldwide GDP loss from Hubei province as COVID-19 rattles nations, markets
Virginia Tech economists Shaowen Luo and Kwok Ping ‘Byron’ Tsang have completed a study showing the cost of the novel coronavirus (COVID-19) on the GDP of the Chinese and worldwide economies. Based on conservative assumptions, they show that the lockdown of Hubei province has reduced China GDP by 4 percent and global GDP by 1 percent, or $40 billion (USD) and $70 billion (USD) per month, respectively.
The losses for two months of lockdown for the Chinese GDP and worldwide GDP total, respectively, total $80 billion and $140 billion as people in affected regions have stopped going to work or socializing, and as flights are canceled and cross-country travel is restricted. The coronavirus has rattled nerves across the globe as cases near 115,0000 and total known deaths tip past 4,000 as of March 10.
The reach of the virus has resulted in cancellations of national conferences, such as the American Physical Society and the American Chemical Society, and the shuttering of the popular South by Southwest film festival. Additionally, Sony Pictures has postponed the worldwide premiere of the new James Bond thriller “No Time to Die” from April to November. Even Disney has blinked in the face of the epidemic, spiking its premiere of the live-action “Mulan” film in China from March 27 to an undetermined date. The film, thus far, is expected to open as scheduled in other countries. Still, China remains the target audience for the expensive ($200 million estimated) film.
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. Luo said, “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. 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.
Kwok Ping ‘Byron’ Tsang: “The world is more connected now; some disruption in one place has consequences elsewhere. 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.”
Shaowen Luo: “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. 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.”
Shaowen Luo is an assistant professor in the Department of Economics, part of the Virginia Tech College of Science. A macroeconomist, her research focuses on monetary policy and economics of networks and international finance, with more recent work centering on the transmission of shocks in production/ financial networks, and the implications of price rigidities for monetary non-neutrality. Among her published work is “Propagation of Financial Shocks in An Input-output Economy with Trade and Financial Linkage of Firms,” Review of Economic Dynamics.
Kwok Ping ‘Byron’ Tsang is an associate professor in the Department of Economics, part of the Virginia Tech College of Science. He is also a faculty fellow with the Global Forum on Urban and Regional Resilience at Virginia Tech and a member of the Hong Kong Institute of Asia-Pacific Studies’ Economic Research Centre. His research focuses on housing economics, macroeconomics and finance, and monetary history. Among his more current works is studying the market of bitcoin interactions.
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