The Impact of Economic Sanctions on Gross Domestic Product and Social Welfare for Iran: Generalized Stochastic Growth Model

Ongoing sanctions on Iranian economy have proved to be very harmful and detrimental to Iranian economic affairs and social welfare. Evaluating the unfair impacts of these sanctions on Gross Domestic Product (GDP) and social welfare is the aim of this paper. Firstly, we have developed a generalized growth model in the presence of sanctions while treating exchange rate as a random variable. Secondly, three different forms of sanctions are introduced into the model and their bearings on national product and social welfare is studied. The first tier of the sanctions is imposed on consumption, intermediary and capital goods while exchange rate is assumed to have a random behavior. Then sanctions are also imposed on Iranian oil and gas production. We have devised several scenarios using stochastic Hamilton Bellman Jacobian value function (SHBJ) and genetic algorithm optimization methods. Our results of the first and second scenario imply that the level of social welfare is mostly affected by oil and gas sanctions while goods embargo has targeted goods production. The effects of sanctions on GDP and social welfare is represented by a concave curve. This curvature shows that the impact of sanctions on GDP and social welfare is stronger at the beginning than later on when further sanctions are introduced. In the third scenario oil, gas and goods sanctions are imposed simultaneously. Our results also show that the third scenario effects is stronger than the other two. According to the Gross Domestic Product data acquired for year 1390, oil and gas sanctions have lowered the GDP by 30 percent, while the overall reduction in GDP through all sanction collectively is estimated between 30 to 50 Percent.