Guns versus butter model

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In economics, the guns versus butter model is the classic example of the production possibility frontier. It models the relationship between a nation's investment in defense and civilian goods. In this model, a nation has to choose between two options when spending its finite resources. It can buy either guns or butter, or a combination of both. This can be seen as an analogy for choices between defense and civilian spending in more complex economies.

The "guns or butter" model is generally used as a simplification of national spending as a part of GDP. In state-run economies (where GDP is controlled by a central planning authority or the government), as well as nations with consistently stagnant or declining GDP, the "guns and butter" model becomes real. When Ronald Reagan was increasing defense spending the 1980s, the Soviet Union was forced to choose between military spending or civilian spending. Schweizer, Peter; "Reagan's War", Random House, 2002, pp. 207, 218, 230, 232, 238

This model does not typically correlate well with free market economies. Mankiw, Gregory; "Macroeconomics", Worth Publishers, 2003, for GDP model see pp15-41.

The origin of the phrase is not clear, but perhaps the best known early usage was in Nazi Germany. In a Jan. 17, 1936 speech, Minister of Propaganda Joseph Goebbels stated: "We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." Sometime in the summer of the same year, Hermann Goering announced in a speech, "Guns will make us powerful; butter will only make us fat." [The Columbia World of Quotations, Columbia University Press, 1996, #25152]

The nation will have to decide which level of guns and butter best fulfill its needs, with its choice being partly influenced by the military spending and military stance of potential opponents.

The peace dividend is the amount of civilian goods produced by a decrease in defense spending.

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