Defence Economics Questions and Answers

Answer: A

The argument was made by President Eisenhower.

In his farewell address of 17 January 1961, President Dwight D. Eisenhower warned Americans against the 'acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex', the alliance of a permanent arms industry with the armed forces and the government.

John F. Kennedy succeeded him that month, Ronald Reagan presided over the arms build-up of the 1980s, and Henry Kissinger was a National Security Advisor and Secretary of State, not a president giving a farewell address.

Answer: C

TRIMS relates to investment.

TRIMs, the Agreement on Trade-Related Investment Measures, is one of the WTO agreements concluded in the Uruguay Round (1994). It bars measures imposed on foreign investors that distort trade in goods, such as local content requirements and trade-balancing requirements.

Although 'trade' is part of its name, the agreement's subject is investment measures, which is why option A is the trap. Telecommunications falls under the services agreement (GATS), and monetary issues belong to the IMF rather than the WTO.

Answer: D

The one that is not a determinant is Non-Cooperation by Opposition.

A country's defence expenditure is shaped by its economic condition, which sets what it can afford; its geography, such as the length and terrain of its borders and coastline; and its relations with its neighbours, which set the threats it faces. Other recognised determinants include threat perception, alliances and technology.

Non-cooperation by the parliamentary opposition is a matter of domestic politics that may affect the passage of a budget in a given year, but it is not a factor that determines the level of defence spending.

Answer: D

The keyed answer is economic interdependence.

Globalisation, the growing flow of goods, services, capital, technology and people across borders, has made national economies depend on one another: a crisis in one market, as in 2008, spreads to others. Economic interdependence is the broad result that the other trends feed into.

Financial integration is one channel of it, not the whole. A monetary union, such as the euro area, is a regional arrangement, not a result of globalisation as such, and global free trade has not been achieved, since tariffs and trade barriers remain.

Answer: D

Inflation is associated with price rise.

Inflation is defined as a sustained rise in the general level of prices, which means a fall in the purchasing power of money. It is measured by indices such as the Consumer Price Index.

An increase in the money in circulation is one of its causes, the monetarist explanation, but not the phenomenon itself; inflation can also come from rising costs or demand. A decrease in money circulation tends to lower prices, and a negative balance of payments is an external account problem that may accompany inflation without defining it.

Answer: C

Defence expenditure is primarily determined by threat perception.

A state decides how much to spend on its forces according to the threats it expects to face, from potential adversaries, insurgencies or terrorism, and the forces it needs to deter or defeat them. A higher perceived threat, such as a hostile neighbour's military build-up, drives spending up.

Foreign policy shapes the threat picture, and technology and communications affect what the spending buys, but the primary determinant of the size of the defence budget is the perceived threat.

Answer: C

Adam Smith's views include (i), (ii) and (iii).

In The Wealth of Nations (Book V), Smith holds that defence is the first duty of the sovereign, protecting society from violence and invasion by other societies (i). As societies advance, a professional standing army becomes necessary, being superior to a militia (ii). And since defence benefits the whole society, its expense should be defrayed by the general contribution of the whole society (iii).

Statement (iv) is wrong for defence: Smith applies payment according to benefit to services that benefit particular persons, such as roads or the administration of justice in some cases, but not to defence, which serves everyone. So the code including (iv) is ruled out.

Answer: B

Laissez faire means a policy of non-interference by the state.

The French phrase means 'let do' or 'leave alone'. It was the slogan of the eighteenth-century Physiocrats and became the watchword of classical liberal economics: the state should keep out of trade and industry and leave prices, wages and production to private individuals and the market.

'Right to interfere' is the opposite idea. The third option inverts the meaning, since laissez faire asks that individuals be left alone to do what they like. With a correct option present, 'None of the above' does not apply.

Answer: C

It comes under capital expenditure.

Capital expenditure is spending that creates assets or reduces liabilities: buying land, constructing buildings, acquiring machinery and equipment. In defence budgets, the purchase of aircraft, ships and weapon systems and the building of military works are booked as capital expenditure.

Revenue expenditure covers recurring costs such as pay, pensions, stores and maintenance, which create no asset. A capital receipt is money coming in, such as loans or disinvestment, not money spent. Aggregate demand is a macroeconomic total, not a budget head.

Answer: C

The idea is Adam Smith's.

In Book V of The Wealth of Nations (1776), on the expenses of the sovereign, Smith argued that defence is the first duty of the state and that, as society advances, a professional standing army is a more efficient use of defence spending than a militia, because the division of labour applies to soldiering too: full-time trained soldiers fight far better than part-time citizens.

David Ricardo wrote on how wars should be financed, Jean-Baptiste Say (printed 'Baptine') on markets and production, and Malthus on population. None made the standing-army argument.