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The Effect of Foreign Military Sales on the U.S. Economy

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Staff working paper

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This study analyzes the macroeconomic effects on the U.S. economy of the sale of U.S. arms abroad. More specifically, it estimates the effect on domestic employment, the gross national product, price levels and other standard indices of a ban on foreign military sales. The study represents the second part of an analysis of economic and budgetary aspects of arms sales. The first part estimated the budgetary cost savings to the U.S. Department of Defense DOD which result from foreign military sales. The analysis reported in this paper was structured to compare projections of the U.S. economy under two alternative assumptions about the foreign military sales FMS program. One assumption is that of a foreign military sales program which is constant in real terms, remaining at the fiscal year 1976 level of 8.2 billion per year for fiscal year 1977 through fiscal year 1981. This means that 8.2 billion in fiscal year 1976 dollars in new orders would be accepted in each of these years. The program mix among weapons, services and construction is assumed to be roughly equivalent to the mix in fiscal year 1976. The second alternative assumption is that of a complete ban on new sales orders under the FMS program beginning with fiscal year 1977. Although new sales would be banned, all orders received prior to October 1, 1976, would be honored. The analysis in the paper focuses only on government-to-government foreign military sales commercial sales, which were not a part of this analysis, represent a relatively small part of the total sales of U.S. arms abroad, approximately 0.6 billion in fiscal year 1976. There is no reason to expect that the economic effects of commercial sales are significantly different from those of government-to-government sales.

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  • Economics and Cost Analysis

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