Input-Output Analysis

Question 1

What does IO analysis enable? Why can’t econometric models be used?

Answer 1

• 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

Question 2

Using Oil price shocks as a case study, show how IO works

Answer 2

• 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

Question 3

What are the direct and indirect implications of falls in oil prices

Answer 3

• 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

Question 4

In the US, how much does the Oil industry account for of capital expenditure?

Answer 4

• 14%

Question 5

What are IO tables?

Answer 5

• A tool for cross-checking the consistency of Government statistics
• The tables can analyse how changes can impact other industries

Question 6

Briefly outline the history of IO tables

Answer 6

• 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

Question 7

How do you interpret xᴬᴮ in the IO table?

Answer 7

• How much industry B buys from industry A
• How much industry A sells to industry B

Question 8

What are more properties of an IO table?

Answer 8

• Purchases are in columns
• Sales are in rows
• Xᴬᴬ is the inter-industry trading
• Total demand = Total output

Question 9

What do primary inputs comprise of?

Answer 9

• Primary inputs consist of payment to workers, owners of capital and the Government

Question 10

What do final demands comprise of?

Answer 10

• 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

Question 11

What is the transaction Matrix?

Answer 11

• The matrix illustrating the elements of the IO table indicating intermediate sales and purchases

Question 12

How can you find the direct requirements matrix? What can this do?

Answer 12

• Dividing each component of the transaction matric by sector output
• Shows the direct impact of changes in sectoral demand
• If output changes by £1

Question 13

Prove Leontief’s inverse matrix formula

Answer 13

• 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

Question 14

How can IO analysis be used to forecast?

Answer 14

• Using multipliers, we can predict the effect of a change in the economy

Question 15

What are some examples of multipliers?

Answer 15

• Output Multipliers
• Employment Multipliers
• Household income Multipliers
• Other Multipliers

Question 16

What is the difference between Type I and Type II Multipliers

Answer 16

• 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”

Question 17

What are the types of effects of the Type I / Type II multipliers?

Answer 17

• Indirect effect comes from IO relationship between sectors in the econom y
• Induced effects come from the responses of HH consumption to the increase in Household income

Question 18

What are the ideal uses for both Type I and II multipliers?

Answer 18

• Type I is ideal if labour is fully employed
• Type II is ideal for small open economies

Question 19

What is the Type I Output Multiplier?

Answer 19

• 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

Question 20

What is the Household Income Multiplier?

Answer 20

• Estimate the effect on total consumption of employees (V1) caused by one unit of change in the compensation of employees in the target sector

Question 21

How do you construct and calculate the Household Income Multiplier?

Answer 21

• Income counts as compensation to employees/wages and comes under Value added V1
• Other incomes come under Value added V2
• Then, using Leontief inverse matric and technical coefficients, you should multiply each element, sum it up and divide by the technical coefficient (V1/ΣO)

Question 22

What is the Employment Multiplier?

Answer 22

• 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

Question 23

What are the other multipliers that can exist?

Answer 23

• GDP
• GVA
• Environmental

Question 24

What are some assumptions in the IO tables?

Answer 24

• 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)

Question 25

How are IO tables constructed?

Answer 25

• It is a costly process: must contact and survey firms
• 1. Info on industry sales and purchase patterns
• 2. 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

Question 26

How can IO tables be used?

Answer 26

• 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

Question 27

What are the advantages of IO tables?

Answer 27

• Detailed and disaggregated analysis of industries
• SR assumptions are accurate

Question 28

What are the disadvantages of IO tables?

Answer 28

• Supply-side is ignored
• Assumptions are limited
• Data requirements