The economics of war can be defined as the study of the allocation of resources, including manpower, natural resources, instruments and agents of production employed for the prosecution of war. Therefore, people's occupations will change to satisfy the requirements of war, while raw materials, power, buildings and machines will have revised uses to facilitate war functions.
War forces great changes in the economic life of nations engaged in battle and those who are far removed from the scene of war. Countries who are directly involved in combat are faced with prompt and enormous demands which war imposes on their productive systems. Meanwhile, nations who are not directly involved can be affected by a change in international economic relations.
Nations confronted with war, or engaged in war, often subject their economic systems to wider governmental controls as meeting the needs of wartime presents a distinct difference between peacetime and war economy. When a society is confronted with war, fundamental changes occur in the overall purpose and activities among people within that society. The social aim is winning the war, whether it is for the maintenance of political and economic freedom, conquest or any other reason. When this occurs, many people's social activities of peace time, may not be as relevant or useful during war time.
Countries engaging in combat include a population which owns a certain quantity of material resources, including manpower and raw materials. The size of the population and its distribution by age and occupation is of importance to the field of war economics. Observations show that nations with greater economic war potential are likely to gain the upper hand, although this does not guarantee victory. The quality of a country's military and political organization is central to war, along with the nation's capacity for adaption and organization.
It has been historically recognized that a strong population is a pre-requisite to successful warfare. The size and composition of the population involves two key factors - the number of soldiers and the number of producers. For the purposes of war, the population will consist of men, women, children and older generations. The density, productive efficiency and political homogeneity of the population are factors to consider of whether it is more advantageous for nations going to battle.
Access to raw materials is also an important element of the war potential. These materials consist of basic foodstuffs, industrial products and other properties of a nation. If they are not available from within the home land, allied land or friendly neutral territories, the problem of substitutes arise. Regeneration of substances or use of substitutes may occur to replace raw materials. Other significant factors include infrastructure and distribution facilities. It may be argued that countries with access to all materials necessary for its industries hold a strong position.
When reviewing the economic war potential of a nation, the two elements of population power and raw material are closely integrated to create a sense of synthesis involving facilities of production, distributions, transportation and finance. However, this is not an automatic consequence of these elements. For example, China is densely populated and has ample supply of raw materials but some economists might argue that it has a weak infrastructure.
In contrast to this, industrialized countries such as Italy possess few raw resources. The aggregate volume of production facilities is an important aspect of its usefulness, as long as it is provided in the right proportions. Proportionally, these come under mining, manufacturing and agriculture. Methodical preparation of productive equipment for war may be undertaken under governmental control during peace times, to provide a high degree of self-sufficiency.
There is an upsurge of military demand when engaged in war. Military forces have an increase volume and urgency for food, clothes and transport. The renewal of these elements is driven by the directly proportion of the intensity of the fighting. During this time, countries see a speedy and large curtailment of civilian demand, where consumers halt various expenditure plans.
Financing warfare comes from both public and private sectors to maximize total production. The issue of inflation is important during these times, where there is an excess of demand, public and privately. The significance of inflation is the fact the difficulties of maintaining sound government finance are greatly multiplied, and the gross inequities arise among various elements of the population. The war effort itself may be seriously harmed unless prices are kept down, so long as there remain sustainable resources through the war.