InputOutput Model Sittidaj Pongkijvorasin Faculty of Economics Chulalongkorn

Input-Output Model Sittidaj Pongkijvorasin Faculty of Economics, Chulalongkorn University

What is I-O Model? n n The Input-output model of economics uses a matrix representation of a nation's (or a region's) economy to predict the effect of changes in one industry on others and by consumers, government, and foreign suppliers on the economy. (Wikipedia) First developed by Leontief, who later won Nobel Prize for this.

Concept q q Industries are interdependent Industries use the products of other industries to produce their own products. For example - automobile producers use steel, glass, rubber, and plastic products to produce automobiles. When you buy a car, you affect the demand for glass, plastic, steel, etc.

Steel Glass Tires Plastic Other Components Automobile Factory garnet. acns. fsu. edu/~tchapin/urp 5261/lectures/Input-Output%20 Overview. ppt

From the Tire Producer’s Perspective Individual Consumers School Districts Tire Factory FINAL DEMAND FOR TIRES Trucking Companies Automobile Factory INTERMEDIATE DEMAND FOR TIRES garnet. acns. fsu. edu/~tchapin/urp 5261/lectures/Input-Output%20 Overview. ppt

Simplified Circular Flow View of The Economy $$ Consumption Spending (Yi) Goods & Services Households Businesses Labor $$ Wages & Salaries Households buy the output of business: final demand or Yi Households sell labor & other inputs to business as inputs to production Taken from a Power Point presentation prepared by Pam Perlich at the University of Utah. http: //www. business. utah. edu/~bebrpsp/IO/IO. ppt Businesses purchase from other businesses to produce their own goods / services. This is intermediate demand or xij (output of industry i sold to industry j)

Input-Output Table Inputs Outputs Interindustry Demand Final Demand Z Y Total Output, X

Computation

Computation

Concept Purchasing Sectors ($ million) Agriculture Health Services Final Total Demands Selling Sectors ($ million) Output Agriculture 10 6 2 18 36 Health 4 4 3 26 37 Services 6 2 1 35 44 Final Payments 16 25 38 0 79 Total Input 36 37 44 79 196

Advantage n n n Sector-level analysis (170 sectors for Thailand, 4 xx sectors for the U. S. ) General equilibrium Easy to construct (if I-O table exists), suitable for the real-world policy analysis

How can we use I-O Model? n Example: The effect of fuel tax on Thai economy. Fuel tax Demand system Weight Income (GDP) Final demand I-O Model Output Emissions EIO Model GDP

The problems of I-O Model n n Data availability Constant technical coefficients: “snapshot” Linear relationships between inputs and outputs (no externality, constant return to scale) Each industry has homogenous, and only one, production function