Object of the analysis. Increasing defence expenditures bring back a discussion weather the national defence industry is necessary to sustain economic welfare of a country, boosts innovations and enhances own military sector. Investigation problem. The use of political economy theories in that case could facilitate further research steps and guide scientists that will look for a precise answer to this issue. The aim of this manuscript is to review political economy theories that can be used in defining defence industry as such, and consider practical applicability options of different methodological approaches in the context of defence industry. To reach this aim, following objectives were designed: 1. Describe political economy phenomena and define its evolution; 2. Evaluate traditions of political economy and define their practical significance; 3. Assess methods used in actual analysis of defence industry and define the main findings. Research methods. While writing this article, the comparative literature analysis method was used. The famous scientists such as R. Abdelal, C., Adam, S. Dercon, G. Agostino, J. P. Dunne, L. Pieroni, M. Blyth, G. Browning, A. Kilmister, J. P. Dunne, E. Skons, D. Braddon, A. Gilpin, A. Goldstein, R. Jacson, G. Sorensen, S. Jevons, R. O. Keohane, C. W. Mitchell, I. D. Salavrakos, A. Sen and R. M. Smith were cited and referenced. All used literature is referenced. This article is structured into two big parts. The first part is devoted to the analysis of political economy subject itself and its approaches towards empirical research. The second part is designed to reveal possible application options of different theoretical political economy approaches in the context of defence industry. Outcomes and conclusions. In the context of current analysis of different political economy theories, different approaches on methodology, analytical side, linkage with defence industry, defence spending and possible insights about investigation possibilities the following conclusions were found: Political economy that originated in the XVII–XVIIIth century and currently is adopting different theoretical approaches in most cases is still relying on “grand” theories such as realism (mercantilism), liberalism, and Marxism. The existing variety of research methodologies and tools suggests the “correct” way to examine features of situation based on selected theory. Researches should be aware that even a proper methodology does not guaranty the reliability of research results due to the complexity of political economy subject itself and its interdependency to both political and economic science features. There are different scholars explaining trends and proposing different theoretical approaches to analyse defence sector and its connections (influence) with state. Current dynamics of defence industry led to renewed debates over whether the increase of the military expenditure enhances or deteriorates economic growth and welfare of the state. There have been numerous studies done in defining military expenditure (also research and development programs in the military sector) impact on local and state economies. Regardless of different methodologies used (econometric analyses, macro econometric models, time series models, demand side model, supply side model, cross-country correlation analyses and historical case study) there was no strong evidence that military expenditure is likely to have the negative economic effects on states. Keywords: political economy, defence industry, military expenditure, defence.
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