Question

What is the opportunity cost (in civilian output) of a defense buildup that raises military spending from 4.1 to 4.5 percent of a $7 trillion economy?

Answer 1

In economics and investments, opportunity cost is the amount of money that a company could have gained, but lost because they took another course of action. This is especially applicable to situations wherein a company decides on which of the two events they would choose.

In other words, opportunity cost can be the net gain or loss that a company obtains when upon getting to the decision. Suppose, we chose a spending of 4.5%, the opportunity cost would be:

Opportunity cost = $7 trillion (4.5% - 4.1%)
Opportunity cost = $7 trillion(0.004)
Opportunity cost = $0.028 trillion or $28 billion

Therefore, the opportunity cost is $28 billion.