Nepal After Earthquake

Nepal After the Earthquake

On April 25, 2015, Nepal, a small country in South Asia, was hit with a massive 7.8-magnitude earthquake, the strongest to hit the region since 1934.  As one of the poorest countries in Asia with an unemployment rate above 40% and a per capita GDP of $1000, the impact of this earthquake was devastating. Nepal’s tourism, an industry that that accounts for 10% of the country’s GDP, has come to a halt as the nation is in a state of emergency. With a death toll of at least 5,000 people, and damages exceeding $10 billion (about half of Nepal’s total GDP), Nepal’s economy will see effects of this earthquake years down the road.

        Due to the widespread damage caused by the Earthquake, and the steep decline in tourism, Nepal’s aggregate demand and supply will both decrease. Attractions, such as Mt. Everest, bring in over 600,000 visitors each year to the small nation… visitors that will spend money in hotels, restaurants, and shops.  As travel agencies cancel bookings, visitors will spike and might possibly not reach he pre-earthquake levels for quite some time. In some cases, such as with collapsed ancient Hindu and Buddhist temples, the damage cannot be reversed. Permanent loss of an ancient temple, an attraction for tourists, means a loss in capital, therefore resulting in a decrease in a decrease in the long range aggregate supply. With the decline in tourism, an industry employing over 1 million Nepalese, firms will have to lay off workers. With thousands left homeless, and businesses destroyed, Nepal’s unemployment rate immediately increases.  

        If there is a silver lining in this tragedy, it’s that with the decrease in Nepal’s GDP will result in a lower rate of inflation. With the decrease in aggregate demand and increase in unemployment rate, Nepalese can expect a lower rate of inflation according to the Phillips curve. Because the labor force increases with unemployment, businesses in Nepal won’t feel the need to raise wages to attract labor. Due to wages generally staying level (if not decreasing), the rate general inflation in the price of goods will start to decrease.

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Resulting from the decrease in net exports (tourism) and consumer spending, Nepal’s  GDP is projected to decrease from anywhere between 4-5%, a blow to an already fragile economy. Because GDP and the aggregate demand curve comprise of the same four components (Y= C+I+G+X), the decrease in GDP results in a left shift from AD1 to AD2. Also, because of the destruction of some businesses, and a decrease in population, Nepal is no longer producing at its pre-earthquake level, therefore shifting the aggregate supply curve from AS1 to AS2. Also, because of the loss of some irreplaceable capital such as an ancient temple, the long run aggregate supply will also shift left as Nepal’s potential to produce in the long run decreases. Interestingly, we cannot really determine whether the new price level is higher or lower than the original this graph as we do not have the exact shifts of Nepal’s aggregate supply and demand just yet. It’s important to note that money that is given in aid to Nepal does not count toward its GDP.