Input-Output Analysis Flashcards
Week 5 & 6
What does IO analysis enable? Why can’t econometric models be used?
- To trace the effects of changes in demand in one sector of the economy on demand in other sectors
- Econometric models only forecast demand in one sector- cannot show the relation between variables
Using Oil price shocks as a case study, show how IO works
- Oil and gas are inputs in the production process for many other goods and services
- Oil and gas is also a major industry
- Downturn in oil prices cause lower capital expenditure
What are the direct and indirect implications of falls in oil prices
- DIRECT: Investment and production fall so jobs are lost
- SECONDARY: Slowdown in the steel and fracking industry, less demand for labour of lawyers and engineers
In the US, how much does the Oil industry account for of capital expenditure?
- 14%
What are IO tables?
- A tool for cross-checking the consistency of Government statistics
- The tables can analyse how changes can impact other industries
Briefly outline the history of IO tables
- First introduced in the Tableau Economique by Francois Quesnay (1756)
- Wassily Leontief produced a series of detailed IO matrices for the US economy 1919-39
- This won him a Nobel Prize in 1973
How do you interpret xᴬᴮ in the IO table?
- How much industry B buys from industry A
- How much industry A sells to industry B
What are more properties of an IO table?
- Purchases are in columns
- Sales are in rows
- Xᴬᴬ is the inter-industry trading
- Total demand = Total output
What do primary inputs comprise of?
- Primary inputs consist of payment to workers, owners of capital and the Government
What do final demands comprise of?
- Sales to ultimate consumers:
- This can be boiled down to; households, Governments, fixed formation of capital, and net exports
- This gives us the equation;
C + I + G + NX = GDP
What is the transaction Matrix?
- The matrix illustrating the elements of the IO table indicating intermediate sales and purchases
How can you find the direct requirements matrix? What can this do?
- Dividing each component of the transaction matrix by sector output
- Shows the direct impact of changes in sectoral demand
- If output changes by £1
Prove Leontief’s inverse matrix formula
- d = Ad + f
- Subtracting Ad from both sides, we see:
- d - Ad = f
- Factoring d out and dividing by (I-A) where I is the identity matrix
- d = f / (I-A)
- Making L = (I-A)⁻¹, d =Lf
How can IO analysis be used to forecast?
- Using multipliers, we can predict the effect of a change in the economy
What are some examples of multipliers?
- Output Multipliers
- Employment Multipliers
- Household income Multipliers
- Other Multipliers
What is the difference between Type I and Type II Multipliers
- Type I multipliers treat households as exogenous
- When household income rises, there are induced effects of consumption rising
- The solution is to treat households like they are in the producing sector and not a part of final demand
- Households would consume inputs from “other industries” and produce output consumed by “other industries”
What are the types of effects of the Type I / Type II multipliers?
- Direct effects are the exact implications on the sector
- Indirect effect comes from IO relationship between sectors in the economy
- Induced effects come from the responses of HH consumption to the increase in Household income
What are the ideal uses for both Type I and II multipliers?
- Type I is ideal if labour is fully employed
- Type II is ideal for small open economies
What is the Type I Output Multiplier? How can this be calculated?
- Sum of Leontief coefficients for the sector designated by the column
- £1 increase in final demand will increase total output in a sector by £x
What is the Household Income Multiplier?
- Estimate the effect on total consumption of employees (V1) caused by one unit of change in the compensation of employees in the target sector
How do you construct and calculate the Household Income Multiplier?
- Income counts as compensation to employees/wages and comes under Value added V1
- Other incomes come under Value added V2
- Then, using Leontief inverse matrix and technical coefficients, you should multiply each element, sum it up and divide by the technical coefficient (V1/ΣO)
What is the Employment Multiplier?
- Provides estimates of the number of jobs likely to be generated in the economy as a consequence of extra job creation in an industry
- This differs from employment effects, which measure changes in employment as a result of an increase in final demand
What are the other multipliers that can exist?
- GDP
- GVA
- Environmental
What are some assumptions in the IO tables?
- Fixed linear production function
- Constant returns to scale and no technological improvements
- No supply constraint
- Constant prices and no joint prices
- Information is a yearly snapshot (IO tables produced ~ 5Yrs)
How are IO tables constructed?
- It is a costly process: must contact and
surveyfirms - Info on industry sales and purchase patterns
- Spending on Labour (Comp. for employers)
- Sample of firms from each industry
- For national IO it is required by law, but regional IO has low participation
How can IO tables be used?
- Information: What does the economy look like?
- Provides an estimate for national accounting
- Estimates direct and indirect impacts of changes
- Decision-making tool
- Evaluate market prospects and identify markets
- Useful to firms, Government and Policy makers
What are the advantages of IO tables?
- Detailed and disaggregated analysis of industries
- SR assumptions are accurate
What are the disadvantages of IO tables?
- Supply-side is ignored
- Assumptions are limited
- Data requirements
