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Chicago Fed Letter, No. 53, January 1992
The Effect of Defense Cuts on the Chicago Economy
 Potential reductions in defense spending raise the issue of how these reductions will affect local and regional economies. One important issue is the dollar amount of the reduction. Regions that received proportionately greater defense funds stand to lose more by spending cuts. Another issue is the kind of product supplied by the region. A firm selling screwdrivers to the Pentagon can probably find other markets for its product, whereas a firm selling aircraft weapons systems may have more problems. Thus, a region supplying weapons systems to the military will be hurt more by cuts in defense spending than a region supplying screwdrivers. Measuring the economic impact of spending cuts on a region's economy is more complicated than it might first appear. Clearly, a reduction in defense spending will affect defense contractors. These are the direct effects of a spending cut. There may also be indirect effects, as the firms supplying goods and services to defense contractors are also affected. One way to measure the economic impact of a change in spending is to use an Input-Output (I-O) model, which provides an estimate of the change in output, taking into consideration both direct and indirect effects, for a given change in defense procurements.
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