global economy assignment chapter 19

Introduction to International Trade

Chapter objectives.

In this chapter, you will learn about:

• Absolute and Comparative Advantage
• What Happens When a Country Has an Absolute Advantage in All Goods
• Intra-industry Trade between Similar Economies
• The Benefits of Reducing Barriers to International Trade

Bring It Home

Just whose iphone is it.

The iPhone is a global product. Apple does not manufacture the iPhone components, nor does it assemble them. The assembly is done by Foxconn Corporation, a Taiwanese company, at its factory in Sengzhen, China. But, Samsung, the electronics firm and competitor to Apple, actually supplies many of the parts that make up an iPhone—representing about 26% of the costs of production. That means, that Samsung is both the biggest supplier and biggest competitor for Apple. Why do these two firms work together to produce the iPhone? To understand the economic logic behind international trade, you have to accept, as these firms do, that trade is about mutually beneficial exchange. Samsung is one of the world’s largest electronics parts suppliers. Apple lets Samsung focus on making the best parts, which allows Apple to concentrate on its strength—designing elegant products that are easy to use. If each company (and by extension each country) focuses on what it does best, there will be gains for all through trade.

We live in a global marketplace. The food on your table might include fresh fruit from Chile, cheese from France, and bottled water from Scotland. Your wireless phone might have been made in Taiwan or Korea. The clothes you wear might be designed in Italy and manufactured in China. The toys you give to a child might have come from India. The car you drive might come from Japan, Germany, or Korea. The gasoline in the tank might be refined from crude oil from Saudi Arabia, Mexico, or Nigeria. As a worker, if your job is involved with farming, machinery, airplanes, cars, scientific instruments, or many other technology-related industries, the odds are good that a hearty proportion of the sales of your employer—and hence the money that pays your salary—comes from export sales. We are all linked by international trade, and the volume of that trade has grown dramatically in the last few decades.

The first wave of globalization started in the nineteenth century and lasted up to the beginning of World War I. Over that time, global exports as a share of global GDP rose from less than 1% of GDP in 1820 to 9% of GDP in 1913. As the Nobel Prize-winning economist Paul Krugman of Princeton University wrote in 1995:

It is a late-twentieth-century conceit that we invented the global economy just yesterday. In fact, world markets achieved an impressive degree of integration during the second half of the nineteenth century. Indeed, if one wants a specific date for the beginning of a truly global economy, one might well choose 1869, the year in which both the Suez Canal and the Union Pacific railroad were completed. By the eve of the First World War steamships and railroads had created markets for standardized commodities, like wheat and wool, that were fully global in their reach. Even the global flow of information was better than modern observers, focused on electronic technology, tend to realize: the first submarine telegraph cable was laid under the Atlantic in 1858, and by 1900 all of the world’s major economic regions could effectively communicate instantaneously.

This first wave of globalization crashed to a halt early in the twentieth century. World War I severed many economic connections. During the Great Depression of the 1930s, many nations misguidedly tried to fix their own economies by reducing foreign trade with others. World War II further hindered international trade. Global flows of goods and financial capital were rebuilt only slowly after World War II. It was not until the early 1980s that global economic forces again became as important, relative to the size of the world economy, as they were before World War I.

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Fifth National Climate Assessment 19. Economics

Introduction.

The climate is a national asset that enables and contributes value to diverse economic activities across the United States, from agriculture, finance, and tourism to healthcare, education, and real estate. Changes in the climate are expected to impose substantial new costs to the US economy and adversely affect the economic opportunities of most Americans. Climate change, and the policies adopted in response to it, are also expected to alter both the domestic US economy and the global economy in which the US competes. These economic consequences are projected to be highly uneven across US regions, industries, and communities.

Hsiang, S., S. Greenhill, J. Martinich, M. Grasso, R.M. Schuster, L. Barrage, D.B. Diaz, H. Hong, C. Kousky, T. Phan, M.C. Sarofim, W. Schlenker, B. Simon, and S.E. Sneeringer, 2023: Ch. 19. Economics. In: Fifth National Climate Assessment . Crimmins, A.R., C.W. Avery, D.R. Easterling, K.E. Kunkel, B.C. Stewart, and T.K. Maycock, Eds. U.S. Global Change Research Program, Washington, DC, USA. https://doi.org/10.7930/NCA5.2023.CH19

Climate change has direct and indirect effects on economic outcomes. Direct impacts affect individuals and other basic components of the economy (e.g., buildings, crops). These direct impacts may in turn cause secondary indirect impacts resulting from markets, governments, and other institutions adjusting to direct changes. For example, changes in rainfall patterns and sea level rise put existing homes at risk of flooding, a direct effect. Elevated flood risk in turn causes indirect effects, including lowering home prices, increasing risks to mortgage-providing businesses, and altering the cost of flood insurance provided by the Federal Government.

This chapter assesses the effects of climate change on US markets, budgets, and the economic opportunities of households, businesses, and institutions. This chapter does not assess the economics of climate change mitigation and technological solutions, which are covered elsewhere (e.g., KMs 31.1 , 31.2 , 17.3 ). 1 , 2

Climate Change Affects the Economy Directly

Climate change directly impacts the economy through increases in temperature, rising sea levels, and more frequent and intense weather-related extreme events (e.g., wildfires, floods, hurricanes, droughts), which are estimated to generate substantial and increasing economic costs in many sectors (likely, high confidence) . These impacts are projected to be distributed unequally, affecting certain regions, industries, and socioeconomic groups more than others (very likely, high confidence) . Adaptation can attenuate some impacts by reducing vulnerability to climate change, but adaptation strategies vary in their effectiveness and costs (medium confidence) .

Observed Direct Impacts

Direct economic impacts of climate change have been observed in many economic sectors (e.g., Table 19.1a ). For example, more frequent extreme events and higher temperatures lead to direct economic losses via infrastructure damage, 3 worker injuries, 4 and crop loss. 5

Climate change also directly affects valuable resources that are not traded in markets, such as human health and ecosystems. These nonmarket impacts are sometimes difficult to quantify but are nonetheless economically important and represent a substantial fraction of the economic burden of climate change on Americans (Table 19.1c ). For example, rising temperatures, extreme weather, wildfires, vector-borne diseases, food insecurity, and knowledge of the threat of climate change itself have all been linked to declines in Americans’ physical and mental health. 6 , 7 , 8 , 9 , 10 Additionally, changes in ecosystems caused by climate change have impacted food production, water resources, forestry, human health, real estate values, recreation, and tourism (KM 6.1 , KM 7.3 ). 11 , 12 , 13

Projected Direct Impacts

While some economic impacts of climate change are already being felt, the impacts of future changes are projected to be more significant and apparent across more sectors of the economy (e.g., Figure 19.1 and Table 19.1b ). With every additional degree of warming, the United States is expected to see increasingly adverse consequences. For example, warming global temperatures by 2°F is projected to cause more than twice the economic harm induced by 1°F of warming. 14 , 15

As climate change advances, economic risks are projected to grow over time. For example, weather-related disasters currently generate at least $150 billion per year (in 2022 dollars) in direct damages to the US, 16 a cost that is projected to increase due to climate change in the near term. 17 , 18 , 19 Over the next few decades, climate change is projected to cause ecosystem disruptions, 20 water stress, 21 and agricultural losses. 22 , 23 , 24 , 25 , 26 , 27 , 28 Over the coming century, the country faces relocation costs and damage to property and infrastructure due to coastal flooding, 29 major adverse impacts on ecosystem services, 30 substantial and unequal health costs, 7 large negative impacts on economic production, 31 and a restructured investment landscape. 32

While many sectors are impacted by changing weather conditions, agriculture is also directly impacted by higher carbon dioxide (CO 2 ) levels, because plants use CO 2 during photosynthesis. The effect of a CO 2 -enriched environment is not well understood and depends on crop types and the availability of water and soil nutrients. 33 In some cases, CO 2 enrichment increases biomass but causes the nutritional value of agricultural output to decline. 34 Overall, the risks climate change poses to agriculture are expected to outweigh any potential benefits due to CO 2 fertilization or other factors such as longer growing seasons and expanded crop ranges (KMs 11.1 , 21.1 , 22.4 , 23.3 , 24.1 , 26.2 ).

Projected economic impacts are not certain, as they depend on factors that cannot be known precisely. The largest source of uncertainty in projected impacts is the unknown trajectory of future greenhouse gas emissions, 35 which depend on mitigation policy, economic development, population growth, and other factors (KM 2.3 ). The uncertainty caused by climate change is itself an economic burden, since individuals are generally risk averse (Box 19.1 ). 36 , 37

Economic impacts of climate change will vary by location due to different hazards, regional climate change patterns, and historical climate (Figure 19.1 ; KM 3.4 ). For example, locations that are hot today are generally projected to suffer greater damage because warming from 100°F to 105°F has a larger effect on human health, energy use, labor supply, and crop yields than warming from 60°F to 65°F. 7 , 26 , 38 , 39 Population density also influences the local economic impacts of climate change, since dense populations exacerbate urban heat islands and groundwater drawdown but improve the cost effectiveness of some public adaptation projects, such as seawalls. 40 , 41

Cold regions may benefit from low levels of warming while temperate and hot regions are generally harmed. 15 Within most sectors that have been studied, more Americans are harmed than are helped by climate change (Figure 19.1b ). 3 , 7 , 42 , 43 , 44 , 45 , 46 , 47 Estimates of nationwide impacts indicate a net loss in the economic well-being of American society (Figure 19.1c ; e.g., Hsiang et al. 2017; Rode et al 2021; Hultgren et al. 2022; Rode et al 2022; Carleton et al 2022; Martinich and Crimmins 2019 7 , 15 , 43 , 44 , 45 , 46 ).

a) Sample Current Impact Estimates of Climate Hazards on US Economic Outcomes

Sector

Impact Type	Climate Hazard	Economic Estimate
		Crop insurance payouts	Temperature increases	+19% of federally subsidized payouts
		Rural outmigration	Warming-linked crop failure	+0.17% for 1% crop yield reduction
		Commercial mortgage delinquency	Hurricane	+28% per 10% damage increase
		GDP growth	Hurricane	–0.45 percentage point annual growth rate per hurricane
		Municipal borrowing costs	Sea level rise	+23.4 basis points annualized bond issuance cost per 1% additional GDP loss due to sea level rise
		Municipal budgets	Wildfire	+25 percentage point increase in likelihood of budget deficit
		Social safety net transfers	Hurricane	+$975–$1,440 per capita
		Housing prices	Flooding	–4.6% (in 100-year floodplain)
		Student learning	Temperature increases	1% decrease in test scores per 1°F hotter school year (no adaptation)
		Property values	Sea level rise	–14.7% (1-foot rise)
		Damage to structures and crops	Flooding	+$235 billion per year
		Earnings	Wildfire smoke	–$144 billion per year
		Work injuries	Heat (≥85°F day)	+5%–15% per hot day
		Wages as adult	Heat (≥90°F day)	–0.1% per hot day in utero
		Emergency department costs	Heat (≥80°F day)	+$10,600 per 100,000 people aged 80+
		Mortality	Heat (≥90°F day)	+0.9 deaths per 100,000 people
		Alaska Native village relocation	Warming-linked erosion	$28–$280 million costs per village (adaptation only)

b) Sample Future Impact Estimates of Projected Climate Hazards on US Economic Outcomes

		Agricultural yields (maize, soybeans, winter wheat, spring wheat, cotton, and sorghum)	Temperature, moisture changes	12%–29%* decrease (2050–2100) 20%–48%*** decrease (2050–2100)
		Agricultural yields (maize, soybeans, and cotton)	Temperature, precipitation changes	30%–46%* decrease (2070–2099) 63%–82%*** decrease (2070−2099)
		Aggregate multisector impact	Temperature increases	–0.1%–1.7% GDP loss* 1.5%–5.6% GDP loss***
		Airline network disruption	Temperature increases	+16%–50% recovery costs (2035, global)***
		GDP growth	Temperature increases	–0.13 percentage points per year per 1°F warming
		Income	Temperature increases	–19.6% global GDP per capita (3°C [5.4°F] of warming)
		Income	Hurricanes	29% GDP loss**†
		Federal disaster response	Hurricanes	+$5.2 billion* (2050 annual expenditures) +$36 billion*** (2050 annual expenditures)
		National Flood Insurance Program	Flooding	+$3.9 billion annual losses (2050)* +$5.1 billion annual losses (2100)*
		Property tax revenue	Sea level rise	–1.4% (3-foot rise)
		Public services	Temperature increases	+1.45% costs (2050)***
		Coastal damages	Sea level rise	+$550 billion (optimal adaptation)*** +$2.6 trillion (no adaptation)***
		Electricity outages	Temperature, precipitation changes	+$2.3–$6.8 trillion consumer costs***
		Flooding costs	Flooding	+61% annual losses (2050)*
		Railroad disruption	Temperature increases	+$30–$55 billion* costs from network delays +$43–$73 billion*** costs from network delays
		Road degradation	Temperature, precipitation changes	+$116 billion*** costs†
		Urban drainage degradation	Temperature, precipitation changes	+$29 billion*** costs†
		Alaska Native village relocation and protection costs	Flooding, erosion, permafrost subsidence	+$3.9 billion over 50 years (adaptation only)
		Migration from Mexico to US	Temperature, precipitation changes	+0.7 million* migrants +3.2 million*** migrants
		Mortality (all causes)	Wildfire	+9–20 deaths per 100,000 people ≥65 years old (for 50% increase in smoke)
		Suicides	Temperature increases	+5,600–26,000 deaths by 2050***
		Recreation (boating, cycling, hiking, running, water sports)	Temperature, precipitation, snowfall changes	$11.6 billion (annual welfare gains 2050–2100)***
		Recreation (fishing, hunting, skiing, ice skating, snowboarding)	Temperature, precipitation, snowfall changes	$4.6 billion (annual welfare losses 2050–2100)***

c) Sample Impacts That Are Difficult to Quantify in Economic Terms

		Happiness
		Preservation of national landmarks
		Loss of cultural heritage and resources
		Subsistence activities

Adaptation to climate change can reduce some economic impacts. 38 , 40 For example, adaptation is expected to reduce storm-related climate damages by approximately one-third. 76 In some sectors, however, there is limited scope for adaptation (Ch. 31 ). 77 , 78 Natural and human systems may not be able to adapt quickly, so gradual warming is expected to be less harmful than rapid warming. 40 Adaptation can occur when populations have access to technologies or opportunities that lower their vulnerability to harmful conditions at sufficiently low cost. 41 , 79 Around 1% of the US capital stock is estimated to be adaptation capital. 76 Some adaptation strategies require new investments, expenditures, or consumption changes that offset or outweigh their benefits. 7 , 80 , 81 These adaptation costs may be large enough to prevent existing technologies from being utilized, particularly among low-income communities. 41 , 46 Adaptation may also face political difficulties, require behavior changes that populations are reticent to adopt, 82 or depend on technologies that do not yet exist or are in their infancy. 83 These factors make the projected timing and effectiveness of adaptations uncertain. 77

Economic Vulnerability and Inequality

Economic damages from climate change are distributed unevenly across American society, often amplifying existing inequalities (Figure 19.2 ). Certain communities and individuals are more sensitive to climate impacts, are more exposed to climate hazards, or lack the resources to adapt to climate changes and recover from damages caused by natural hazards. 18 , 46 , 76 , 84 , 85 , 86 , 87 , 88 , 89 , 90 , 91 , 92 For example, people with preexisting health conditions and older adults may be relatively more sensitive to heat or air quality impacts such as wildfire smoke (KMs 14.3 , 15.2 ). 4 , 93 Families living below the poverty line often live where climatic changes are expected to be the most economically damaging, like the already-hot Southeast (KMs 22.3 , 22.4 ). 15 Climate-driven relocations of Alaska Native communities have already occurred where warming is happening fastest (KMs 16.1 , 29.3 , 29.5 ). 94 , 95 Climatic stressors have also been shown to increase racial segregation, 96 gentrification, 97 income inequality, 98 and low-income communities’ reliance on social safety net programs and credit systems. 54 , 85 , 99 Climate change also introduces fiscal risks (Figure 19.3 ; KM 19.2 ) that may threaten programs vulnerable communities rely on. 100 Broad research gaps remain about unequal climate change impacts across demographics, health status, and socioeconomic background.

Markets and Budgets Respond to Climate Change

Markets are responding to current and anticipated climate changes, and stronger market responses are expected as climate change progresses (medium confidence) . Climate risks are projected to change asset values as markets and prices adjust to reflect economic conditions that result from climate change (very likely, high confidence) . New costs and challenges will emerge in insurance systems and public budgets that were not originally designed to respond to climate change (high confidence) . Trade and economic growth are projected to be impacted by climate change directly and through policy responses to climate change (likely, medium confidence) .

Markets aggregate information from many individuals and firms, generating system-level outcomes (e.g., market prices). Prices in well-functioning markets will reflect assets’ exposure to future climate risks and expected adaptation costs. For example, anticipation of future flood risk has begun to reduce the prices of vulnerable properties (Figure 19.3 ). 57 , 101 But there are barriers that sometimes prevent market prices from adjusting to reflect climate risks, 102 such as inaccurate information or incomplete understanding of relevant climate risks. 103 , 104 , 105 , 106 Increasing awareness of climate change is expected to tighten the link between asset prices and climate risks in financial markets and may lead to abrupt price adjustments. 52 , 57 , 107 , 108 , 109

Changes in prices due to climate change can have different impacts on producers and consumers. For example, higher temperatures around the globe are expected to lead to a reduction in global production of corn, wheat, rice, and soybeans. 43 This reduction in supply is expected to increase crop prices. 110 In some cases, these higher prices could financially offset the reduction in yields for farmers, but US consumers would face the burden of the higher food prices. 111

Insurance markets are important for financial resilience to changing climate extremes, but insurance coverage is costly, and prices may exceed what households and businesses are willing or able to pay. 112 As the risk of climate extremes grows, private insurers are expected to abandon high-hazard areas, as is occurring in some wildfire- and hurricane-prone locations. 113 Uninsured consumers face greater financial distress post-disaster, 114 and public-sector insurance programs, such as crop insurance and the National Flood Insurance Program, see increasing demand when private insurance markets contract. To account for the growing risks, fiscal costs of public insurance programs will rise. 66 , 115

Stock and bond market prices generally reflect anticipated climate risks, 116 but pricing can be incomplete or distorted. 102 , 117 Anticipated policies to curb emissions can impact stock prices of emissions-intensive companies, 108 , 118 and long-term bonds issued by municipalities exposed to future climate risks tend to have lower prices. 52 , 119 In the absence of strong global mitigation policies, some forward-looking financial institutions are preemptively responding to potential impacts by restructuring portfolios. 120 , 121

Public Budgets, Healthcare, and Infrastructure

Climate change will affect public budgets at all levels of government through changes in revenues, spending, and borrowing costs (Figure 19.4 ). 127 , 128 , 129 For example, sea level rise, wildfires, and hurricanes can decrease incomes 65 , 130 and housing values (Figure 19.3 ), 109 , 131 and thus tax revenues, 100 while simultaneously increasing public expenditures for healthcare, income support, 54 disaster assistance, 132 and defense spending. 133 This combination of declining revenue and increasing expenditures increases municipal borrowing costs. 52 , 53 , 100 , 119

Climate change is expected to further increase the costs of public programs, such as crop insurance subsidies, 48 , 115 wildfire suppression, 66 , 134 , 135 endangered species protection, 136 and healthcare provision. 68 , 137 , 138 Given these demands, achieving sustainable public budgets in a changing climate is expected to require additional revenues or other expenditure reductions. 68 , 128

US healthcare is provided by public systems and private markets, both of which will be impacted by climate change. Extreme weather events, such as hurricanes, damage healthcare facilities and impede medical care delivery 139 , 140 , 141 and create competition for healthcare services. 142 The direct health impacts of climate change (e.g., Ch. 15 ; Limaye et al. 2019 143 ) are expected to generate higher medical costs, raising health insurance premiums, out-of-pocket spending, and expenditures on prevention efforts. 7 , 144 , 145

Essential infrastructure, such as water, energy, communication, and transportation systems, will increasingly be compromised by the compounding effects of climate change impacts (Chs. 4 , 5 , 12 , 13 ; Focus on Compound Events ). Degradation or disruption of these assets, many of which are publicly owned, can have substantial repercussions on other sectors and the well-being of households (Table 19.1 ).

Migration, Trade, and Growth

Future climate changes are expected to affect migration patterns, although how these shifts will occur is uncertain. Historical events that have shaped migrations include extended droughts, which drove rural populations toward urban centers, 124 and hurricanes, which have had persistent impacts on where people live. 146 , 147 , 148 Projections of increased flood risks due to sea level rise (KM 2.2 ) are expected to displace substantial populations. 149 , 150 , 151 Climate-driven economic changes abroad, including reductions in crop yields, are expected to continue increasing the rate of immigration to the United States. 73 , 152

Global supply chains can transfer, amplify, or reduce the direct impacts of climate change ( Focus on Risks to Supply Chains ). Climatic events in other countries impact trade with the United States, 153 which in turn affects domestic markets (Ch. 17 ). 154 Climate impacts that affect multiple countries simultaneously amplify costs due to interacting disruptions and linked trade. 155 However, geographic diversification of supply chains would allow for businesses to flexibly adjust supplies to partially reduce their exposure to climate-associated risks. 156

High annual temperatures and tropical cyclones are associated with lower growth in GDP, 31 , 65 , 157 , 158 with responses from multiple industries contributing to this overall effect. For each 1°F increase in global average surface temperature, annual US GDP growth is projected to slow roughly 0.13 percentage points, 31 , 157 , 158 with larger effects for larger temperature changes. These changes in growth rates can in turn affect stock market prices and interest rates. 159 , 160

Economic impacts of climate change will motivate some investments in innovations aimed at reducing or limiting climate damages. For example, development of low-cost air-conditioning 38 and arid-tolerant crop varieties reduced the impact of historical climate conditions. 161 Future innovations may reduce costs or result in new adaptation technologies. However, some adaptation challenges have proven difficult to overcome, 162 and novel adaptive technologies are sometimes costly, often limiting their accessibility to high-income communities. 46 Nonetheless, strategic investments in key adaptation technologies have the potential to generate large social and private returns.

Economic Opportunities for Households, Businesses, and Institutions Will Change

Climate change is projected to impose a variety of new or higher costs on most households and to impact their employment, income, and quality of life (very likely, high confidence) . Climate change will alter the economic landscape that businesses face, generating new risks but also creating new opportunities (likely, medium confidence) . Institutions and governments are expected to see existing programs used more intensively or in new ways as populations cope with climate change, generating new system-wide risks (medium confidence) . Design, evaluation, and deployment of adaptation technologies and policies will strengthen our national preparedness for climate change (high confidence) .

American Households

Climate change will have different economic implications for American households depending on their occupation and where they live. 84 , 157 On average, climate change is projected to reduce future income gains compared to what households would achieve in the absence of climate change. 166

Climate change is expected to impact employment by changing demand for workers, reducing worker safety, 4 altering the location of available jobs, 49 and changing workplace conditions in heat-exposed jobs. 45 , 167 Households may also lose wealth through declines in the value of real estate (Figure 19.3 ).

Climate change will affect household spending, 168 for example, by changing energy use (Ch. 5 ), 169 increasing medical costs (Ch. 15 ), 143 elevating food prices (Ch. 11 ), 111 raising insurance premiums, and requiring more frequent repairs and replacement of assets damaged by extreme events. 16

Children’s economic prospects will be affected by climate change. For example, higher temperatures in utero negatively impact adult economic outcomes, 60 while higher temperatures during childhood reduce learning 56 , 170 and cognitive performance. 171 , 172

Climate change is expected to alter the quality of life for American households 125 by reducing life expectancy, 7 increasing crime and domestic violence, 15 , 173 damaging sleep quality, 174 harming mental health, 6 , 175 reducing happiness, 176 and altering recreation in both positive and negative ways (Table 19.1 ). 75 , 177 , 178 , 179

Adapting to climate change generates new household costs and can alter living and work arrangements. For example, homes may be relocated or retrofitted to withstand weather extremes, 180 , 181 and consumption patterns may change to offset harms from the climate. 62 Importantly, lower-income households may face greater risks from climate change and have fewer resources to support the costs of adaptation (KMs 22.3 , 22.4 ). 98

American Businesses

Climate change is projected to reduce labor productivity and economic output across many sectors—including agriculture, finance, real estate, insurance, and services—and across many regions and states. 15 , 80 , 157 Extreme weather events can reduce output for extended periods, altering GDP growth rates. 158 In projections, these effects can compound over time, generating large cumulative losses. 9 , 31 , 157 , 182

Businesses will face increasing exposure to climate-related risks at local, national, and international levels. For example, more intense heatwaves will reduce local productivity, greater wildfire smoke will lower demand for outdoor services, and more frequent extreme events around the world will disrupt international trade, supply chains, and foreign demand for American products (KM 17.3 ).

Climate change will also affect business investment planning. For example, the location of firm capital investments may change in response to more frequent weather disasters, 183 and regional adaptation efforts may be funded via corporate taxes or impact the rate of return on other investments. 184 Investment strategies for climate-resilient technologies and the total cost of insurance for capital investments are both expected to be impacted by climate change. In addition, uncertainty in impacts and the effectiveness of adaptation may delay investments (see Box 19.1 ).

The management of climate-related business risks can draw on established practices for general risk management. For example, regulators and investors are increasingly requiring businesses to disclose climate risks and management strategies. To support this, risk assessment tools for quantifying physical risks are currently being developed in public and private sectors. 185 , 186

Governments and Institutions

Local, regional, national, and international governments and institutions (e.g., universities, professional associations, nongovernmental organizations) play a major role in facilitating individual and coordinated adaptation responses and enabling cost-effective decisions. Federal agencies are required to develop adaptation plans 187 and assess and mitigate climate-related financial risks, 188 while some states, local governments, and Tribal governments are developing plans varying in scope and complexity (KMs 31.1 , 31.3 , 31.4 , 32.5 ).

Governments at all levels would benefit from preparing for the fiscal impacts of climate change, considering impacts on revenues, expenditure requirements (e.g., healthcare, income support), and borrowing costs. 53 , 68 , 128 Reducing the overall societal cost of extreme events may be possible through investments in public infrastructure, healthcare, and community resilience programs 189 , 190 , 191 and through public support for private adaptation, including fiscal support, 76 updated building codes (Ch. 12 ), 192 , 193 , 194 and better climate-risk information and disclosures. 195 Such public programs also have the potential to reduce the inequitable impacts of climate change. 98 , 196 Financial preparedness by households and public entities, such as through insurance take-up, 52 , 197 improved credit, 52 , 85 and specialized financial instruments, 198 can shift risk or reduce losses. However, public insurance support or provision can decrease incentives for private adaptation. 76 , 199

It is sometimes important for governments or institutions to quantify the overall economic impact of climate changes caused by certain current activities, for example, in analyses of whether the benefits of a new climate policy exceed its costs. A succinct summary description of the benefits of emissions reductions widely used in economic analyses is the “social cost of greenhouse gases,” defined as the cumulative global economic harm to society caused by additional greenhouse gas emissions (Figure 19.5 ). 200 Institutions and governments considering the economic consequences of emissions may find estimates of this measure helpful, although they should familiarize themselves with the analytical and ethical judgments used in its construction. In 2010, twelve agencies from the Federal Government developed a process for estimating the social cost of greenhouse gases and periodically updated it based on scientific advances. 201 The current interim estimate used by the Federal Government, adjusted to 2022 dollars, is $57, $1,700, and $20,000 per ton of carbon dioxide, methane, and nitrous oxide, respectively, for 2020 emissions using a 3% discount rate. 201 There is ongoing research to update these values in accordance with recommendations from the National Academies of Sciences, Engineering, and Medicine. 200

There is growing concern that climate change could pose a systemic risk to financial stability. 202 , 203 , 204 , 205 , 206 , 207 Negative economic impacts on even a limited number of entities could, in principle, lead to cascading effects, causing wider failure in the financial system. For example, declines in property values due to climate change could adversely affect mortgage markets and financial institutions’ balance sheets, potentially leading to financial distress, especially if climate risks are imperfectly priced or if they are concentrated in government-sponsored enterprises. 202 , 206 , 207 , 208 , 209 , 210 While more research is needed to understand these systemic effects, some underlying risks can be managed. For example, the risk of future asset price corrections, driven by misalignment between current prices and the expected effects of climate change, 57 , 101 , 102 , 103 , 109 , 211 can be reduced through communication and disclosure of climate risks to market actors. 109 , 195

Climate change has the potential to undermine conditions that support overall societal stability, which may threaten economic stability, and vice versa. Global warming has the potential to impede the ability of institutions and governmental organizations to function smoothly 175 , 212 and to increase political turnover, 213 and it is directly implicated in increasing rates of violence and unrest. 214 , 215 Some extreme events have triggered widespread mortgage delinquency, 216 insurer default, 217 breakdown in support for leaders, 218 and the migration of large populations domestically 219 , 220 and internationally 221 , 222 —which in turn impacts downstream markets. 146 , 223 Coping with these destabilizing effects may require investment in systems that buffer and stabilize economic and social conditions, such as social safety nets, insurance, defense spending, and confidence-building mechanisms. 54 , 133 , 224

TRACEABLE ACCOUNTS

Process description.

The chapter lead author was identified in July 2021, and the author team was recruited in July–August of 2021. Authors were selected based on their expertise on broad topics critical to the economic impacts of climate change on the US economy. Technical contributors were recruited by January of 2022 and were identified based on their expertise on specific types of impact. Efforts were made to ensure that both the author team and technical contributors represented a diverse range of backgrounds from across the country, including representation from academia, the private sector, nongovernmental organizations, and economic units of the Federal Government. The Economics chapter hosted an online engagement workshop on January 31, 2022. The authors also considered other outreach with stakeholders and inputs provided in the public call for technical material and incorporated the available scientific literature to write the chapter.

Discussion within the team during multiple virtual meetings and email exchanges, along with consideration of a systematic review of available scientific literature developed by the technical contributors, led to the development of three Key Messages. Because previous National Climate Assessments did not have a chapter on economics, the team focused on scientific material that was not previously discussed in other chapters of prior Assessments. Based on scoping by the National Climate Assessment Federal Steering Committee, the Economics chapter focused on the economic impact of climate change on the US economy and did not consider economic aspects of potential mitigation policies, which was out of scope. Particular attention was paid to the emerging scientific understanding of inequity of impacts across the country, which informed all Key Messages. Figures were developed by the author team, with support from technical contributors, to highlight key concepts that support the Key Messages. Entries to the tables of example impacts (Table 19.1 ) were selected, based on an evaluation of their topical importance and breadth of coverage, from a much larger database of more than 300 entries collected by the author team and technical contributors in their review of scientific evidence.

KEY MESSAGES

Read about Confidence and Likelihood

Description of Evidence Base

There is mounting evidence of climate change impacts on economic costs. This literature requires multidisciplinary expertise bridging the physical sciences and economics. Broadly, the approaches to estimating climate impacts include biophysical process models, structural economic models, statistical or empirical methods, and hybrid approaches, with each methodology having strengths and weaknesses. A common finding in the above literature 26 , 38 , 39 , 225 is that moderate temperature and/or rainfall are usually beneficial, while cold and heat spells negatively affect a sector, as do droughts and floods. This implies that impacts will vary by 1) the baseline climate, 2) the predicted change, and 3) the vulnerability to such changes. First, colder places might actually benefit from warming as colder temperatures are replaced with moderate ones. Most of the above papers find an asymmetric relationship with regard to temperature, where being too hot is worse than being too cold. Hence, the effect of an increase in extreme heat is the dominant driver for most places in the US leading to a net loss. Second, predicted climate change is not uniform around the world, and higher latitudes (farther removed from the equator) are predicted to see higher warming. Third, vulnerabilities vary significantly across groups; for example, the sensitivity to extreme heat is larger in cold places, 226 and poorer places tend to have higher mortality effects of hotter temperatures. 7

The literature addresses adaptation either by assessing it directly or assuming results are inclusive of adaptive responses. 7 Examples of directly assessing adaptation include study of the development and penetration of air-conditioning to reduce future temperature-related mortality, 38 the use of drought-tolerant crop varieties to limit the impact of some historical climate events, 161 and the building of seawalls and nourishment of beaches to protect infrastructure and ecosystems from sea level rise. 40 Research often assumes optimal adaptation, but some studies have considered partial adaptation to be more reflective of observed reality. 227

Major Uncertainties and Research Gaps

A major source of uncertainty in estimates of climate change’s economic impacts is representing complex interactions among physical, natural, and social systems. There are a number of critiques of the existing literature but also many important advances. Major uncertainties arise around unmeasured impacts, damages due to non-gradual weather or climate changes, interactions between regions and sectors, projections of population and income growth and technological change, risk aversion, distributional effects, and accounting for adaptation processes and costs. Improving the robustness of economic impact estimates is an active area of research. Scientific advancements in the last decade (National Academies of Sciences, Engineering, Medicine 2017 200 and others) have improved estimates of economic impacts, as well as our understanding of key uncertainties.

One point of uncertainty regards the shape or functional form of the climate damage function. While many empirical studies have found that the increase in global, regional, and sectoral damages as the climate warms can be approximated by a quadratic damage function, 15 , 47 , 228 disagreement remains, particularly for higher temperatures. Several studies (Nordhaus 2019; Dietz et al. 2021; Kemp et al. 2022; 229 , 230 , 231 see also Dietz et al. 2022 232 reply to comments by Keen et al. 2022 233 ) argue that the damage function should become substantially steeper at higher levels of warming.

Damage projections in many sectors do not fully account for expected reductions in future vulnerabilities, for example, as has been observed in the past for temperature-related mortality. 7 , 38 More study of how the relationship between sensitivity of impact sectors (such as agricultural yields, mortality, or energy consumption) to weather fluctuations and income has changed over time may improve this area of research, as it remains unknown whether confounding factors influence cross-sectional comparisons sometimes used to estimate patterns of adaptation. Damage projections also rely on projections of future population, income, and technology, which are themselves uncertain.

Description of Confidence and Likelihood

There is high confidence that climate change will directly affect the economy and that impacts will be unevenly distributed, because numerous information sources document these results across many sectors, and studies of the same outcomes generally agree on the sign and magnitude of these impacts. Many findings are replicated by distinct author teams. Furthermore, insights from biology and physiology, derived from experimental and/or observational data, often support econometric findings. However, the changes in the primary drivers of some of these impacts have complex patterns (e.g., wildfires, floods, drought, hurricanes), while some regions or impact categories may see benefits from warming (e.g., avoided heating expenditures). Therefore, taken together, the finding regarding the substantial cost of these impacts is deemed only likely . This same complexity supports the finding of unequal distribution of impacts, so that finding is deemed very likely . This unequal distribution is a direct consequence of the different baseline climate (known by looking at current climate), different amount of warming (consistent finding in climate models), and different underlying vulnerabilities due to social determinants such as sensitivity and adaptive capacity. The finding that currently warm places are more negatively impacted by additional warming than colder places is widely supported and garners high confidence . Similarly, the fact that vulnerabilities vary by income and education has also been repeatedly observed. Neither point is controversial in the literature.

Given the breadth of approaches to analyzing adaptation, the literature is more varied in conclusions drawn regarding the level of risk that adaptation is expected to ameliorate, the cost of the adaptation actions, and the likelihood that these adaptation actions will actually be implemented. Future innovations may reduce the costs of existing adaptation technologies, or they may result in entirely new technologies. However, some adaptation challenges have proven difficult to overcome, 162 and, ultimately, success is uncertain and there do not exist established approaches for forecasting these innovations. Furthermore, public efforts to adapt to the climate sometimes have perverse outcomes, and it is unclear that similar efforts will be dramatically more successful in the future. For example, in the United States, public provision of both crop insurance subsidies and disaster aid have been estimated to increase vulnerability to extreme weather. 76 , 199 For all of these reasons, there is only medium confidence in findings regarding adaptation.

Multiple lines of evidence, including theoretical and empirical analyses, demonstrate effects of anticipated climate risks on financial markets. For example, anticipated increases in flood risks due to sea level rise reduce the prices of vulnerable coastal properties 57 , 101 , 103 and the prices of long-term bonds issued by vulnerable municipalities. 52 , 119 These effects have increased over time, coinciding with increasing investor attention to climate change. 57 , 119 , 234 Emerging evidence demonstrates potential sources of market inefficiencies due to government policies. For example, existing securitization programs by government-sponsored enterprises, such as Fannie Mae and Freddie Mac, unintentionally encourage banks to issue mortgage loans to properties that are exposed to hurricane risks. 209

For public budgets, adverse fiscal impacts of more frequent and intense natural disasters are well established. Hurricanes increase public expenditure requirements for healthcare and other programs, 54 , 132 decrease local tax revenues, 100 and increase municipal borrowing costs. 100 Wildfires have similarly been shown to increase public expenditures on fire suppression and other programs. 53 , 68 , 135 , 192 , 235 , 236 , 237 Evidence on natural disaster impacts on tax revenues is mixed across event types and levels of government (e.g., Liao and Kousky 2022 53 ) find positive local revenue impacts of wildfires in California, due to a unique state law that freezes property assessments for taxes until a sale, and Miao et al. (2018) 163 fail to detect significant tax revenue impacts of disasters at the state level). Certain climate impacts may also have partial fiscal benefits, although the evidence is less strong (e.g., EPA 2017; Barrage 2023 68 , 164 ). However, the same evidence base also suggests negative net impacts. For example, Liao and Kousky (2022) 53 estimate large increases in the probability of municipal deficits as a result of wildfire events. Conceptually, disasters such as hurricanes and flooding can also have adverse impacts on tax bases, such as through negative effects on economic growth 51 , 65 , 101 and property values. 109 , 123 , 131 Finally, the literature documents other fiscal climate costs, such as from infrastructure, 164 the Endangered Species Act, 136 and increasing exposure to flood risk in the balance sheets of financial institutions 208 and government-sponsored enterprises. 209

For insurance, private markets are important for financial resilience and climate adaptation, but these markets may be stressed by climate change. For example, it is well understood that as climate risks grow, it is increasingly difficult for insurers to offer policies at rates that both reflect risks accurately and that consumers are able and willing to pay, leading to a growing disaster insurance gap (e.g., Issler et al. 2020; Netusil et al. 2021; Kousky 2022 113 , 238 , 239 ). Current risk and, thus, insurance pricing systems may become outdated with changing climatic conditions (e.g., GAO 2021 240 ). Evidence suggests that households and businesses with insurance tend to recover better and faster from disasters (reviewed in Kousky 2019, 114 also Billings et al. 2022 85 ).

There is growing evidence that global supply chains can transfer, amplify, or reduce the direct impacts of climate change. Multiple studies have documented that climate events in other countries impact trade with the United States, which in turn affects US domestic market conditions. 110 , 153 , 154 A smaller number of studies have identified ways that climate change also causes physical events that impact entire regions, generating costs that can be amplified by production networks. 155 , 241 It is theoretically well understood that flexible supply chain networks can also enable adaptation to climate change by enabling geographic diversification, 156 although there is not a large body of empirical evidence to demonstrate how this occurs in practice.

There is considerable uncertainty regarding the estimated effects of climate risk exposure on asset values. For example, estimates of the effect of sea level rise risk on coastal real estate prices vary from as large as –20% 57 to zero. 211 There is also substantial uncertainty about the extent of exposure of financial institutions to climate-related risks. 205 More research would be needed to understand how climate risks affect prices and quantities in debt markets, especially the mortgage market and mortgage-backed security market, and to understand the potential sources of market inefficiencies in pricing and allocating climate risks.

For public budgets, while evidence suggests that many public program costs may be affected by climate change, many of these impacts remain unquantified (e.g., law enforcement and military expenditure changes due to potential increases in crime and international conflict, respectively). Research is also limited on interactions between different climate impacts, such as on migration and fiscal outcomes. For both public budgets and insurance markets, policy uncertainty and uncertainty over adaptation compound the difficulty in projecting climate impacts.

There is evidence of market responses to climate change, although the literature on this topic varies in terms of estimates of the magnitude and timing of the response, which leads to a determination of medium confidence for this finding. However, climate risk factors are very likely to be an important driver of asset values in the future. There is already a significant body of research documenting the capitalization of weather-related risks into the prices of durable assets (real estate, stocks, long-term bonds, etc.), including a growing number of papers finding a reflection of the assets’ exposure to future climate risks (e.g., sea level rise, flooding, wildfires, or anticipated carbon policies), leading to a determination that this linkage is very likely , although the magnitude varies and estimates of how price changes will unfold over time are uncertain. The literature on this is robust enough to warrant high confidence . There is high confidence that climate change will stress insurance systems and public budgets that were designed before global warming. This is supported by a large academic literature that considers direct effects of climate change on insured assets such as crops and flood-prone homes, direct effects on publicly funded disaster assistance, and indirect effects on healthcare utilization and social safety net programs. There is also research confirming negative impacts on municipal budgets from natural disasters and projected losses to other public sector budgets. In addition, there is mounting observational evidence of climate stress already impacting markets in certain regions of the country such as Louisiana, Florida, Texas, and California. There is medium confidence that trade and economic growth are both likely to be impacted by climate changes and by the policy responses designed to mitigate climate change. There is broad agreement that climate change will affect trade, but the magnitude and structure of those changes are complex and not fully understood. Similarly, many studies find that climate change affects economic growth, but there is substantial variation in quantitative results depending on which methods and data are used.

Substantial literature supports the conclusion that climate change will impose new costs on households and businesses. 15 , 84 , 157 In particular, research has focused on income, 15 , 31 , 157 , 166 , 242 , 243 , 244 employment, 4 , 39 , 49 , 167 and changes in real estate value. 57 , 101 , 103 , 105 , 211 Businesses face increased costs in a variety of areas. These costs include reduced productivity due to heatwaves, lower demand for outdoor activity at more distant locations due to wildfire smoke, supply chain disruption due to hydrologic extreme events (e.g., tropical cyclones in Asia, where semiconductor manufacturing is concentrated), property damage and business interruption losses from weather-related extremes, 245 , 246 and reduced foreign demand for American products. 5 , 84 , 156

Literature also supports the fact that it is possible to reduce the societal cost of extreme climate-related events through investments in hazard mitigation, 3 , 76 , 247 including updated building codes 192 , 193 , 194 , 248 , 249 and public provision of better climate-risk information, such as flood risk disclosures. 195 , 250 Research has also shown that existing and new programs and activities associated with public and private institutions will need to play a role in helping to mitigate and adapt to climate change. 52 , 53 , 54 , 68 , 100 , 128 , 135 , 163 Household financial preparedness and specialized financial instruments 198 can also play a role in reducing losses from climate extremes. While insurance against natural disasters can financially protect households and businesses, these markets are themselves being stressed by climate change, with much natural disaster coverage now offered through fully or quasi-public programs. 113 It remains the case that those most in need of the financial protection of insurance are least able to afford it. There is strong evidence that public healthcare and social support programs can reduce climate vulnerability in certain settings. 190 , 191

It is challenging to anticipate all the ways that households, businesses, and institutions will change in the face of a wide range of climate impacts; continued research on observed and projected responses to climate changes will refine and improve quantitative estimates of the implications of these changes. In particular, systemic risks have proven more difficult to conceptualize and model, and while they could be extremely costly, they have received less research attention. We also have limited understanding of nonlinearities in the costs or threshold effects that may materialize in both natural and human systems. Public programs can potentially moderate the inequality of climate impacts in important ways, but more research would be required to identify cost-effective and scalable strategies. 251 There are also uncertainties regarding how to target healthcare and other social support programs to achieve the largest net benefits.

There is a large literature base and high agreement regarding the variety of new or higher costs of climate change, leading to the finding of very likely and high confidence for this statement. There is less literature available characterizing the alteration of the economic landscape due to climate change, and while new risks predominate, there is a subset of papers that discuss the potential for new opportunities that business can take advantage of: this leads to the likely and medium confidence finding. Similarly, there is less literature regarding the response of institutions to changing climate conditions, leading to a medium confidence finding. There is extensive literature and a high level of agreement that private and public investments in adaptation and mitigation can reduce household and business costs, leading to the assessment of high confidence .

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Virtually Certain	Very Likely	Likely	As Likely as Not	Unlikely	Very Unikely	Exceptionally Unlikely
99%–100%	90%–100%	66%–100%	33%–66%	0%–33%	0%–10%	0%–1%

Confidence Level

Very High	High	Medium	Low

Resources: Discussions and Assignments

Module 3 assignment: we do it better here, preparation.

This assignment requires you to research a country’s trade advantages within the global economy. In order to successfully complete this assignment, please follow these instructions carefully.

Select a Country

You are to select a country whose name begins with the same letter as YOUR first name. For instance, Linda could select Latvia!

Begin by going to the Global Edge website of Michigan State University . At the Home Page, click on “Global Insights,” which will take you to the page where you can search by Trade Bloc, Country, State, and Industry. Select “Country” from the drop-down menu and begin to find out about your country. Other sources you may want to consider are the U.S. Department of State website —see “Countries and Areas” from the menu at the top of the home page. Also consider the C.I.A. World Fact Book for a list of countries.

Answer the following questions about your country:

• Remember: Absolute advantage is the ability of a country, individual, company, or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.
• Remember: Comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. Even if one country is more efficient in the production of all goods compared to the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.

Prepare a written summary of your findings, following the guidelines for written assignments. You must include the following information in your summary:

• A brief overview of the country you selected (fewer than 50 words)
• The advantage you identified (absolute or comparative)
• Latvia accounts for 80 percent of the world Gizmo markets. The world market for Gizmos is
• [fill in the blank here]
• _______ per year;
• The reason why Latvia has an absolute advantage is
• Latvia benefits from this advantage by
• Assignment: We Do It Better Here. Authored by : Linda Williams and Lumen Learning. License : CC BY: Attribution