In their chapter, Arie Arnon and Nu’man Kanafani propose a macroeco nomic approach that links compensation for Palestinian refugees to the cost of capital imports needed for building a viable Palestinian state and absorbing some of the refugees in this state. The chapter estimates the cost in three steps. In the first step, the chapter estimates the present value of capital imports needed to enable the West Bank GDP to grow at an average annual rate of 3.1 per cent over a 20 year period without taking into consideration the absorption of refugees. The estimates range between $8bn and $10.6bn. In the second step, the chapter estimates the present value of capital imports needed to absorb Palestinian refugees in the West Bank economy under different scenarios regarding the number of the absorbed refugees, the timing of their return, and the degree of integration between Palestinian and Israeli labour markets. These estimates range between $4.4bn (assuming half a million returnees over five years and a high degree of labour market integration) and $12.8bn (assuming one million returnees over two years and relatively low labour market integration). In the third step, the chapter estimates the present value of capital imports needed to improve the standards of living in the Gaza Strip to levels comparable with those in the West Bank, at between $24bn and $27bn.