Using Input Output Models for Policy Making

1
Using Input Output Models for Policy Making

• September 29-30, 2006
•  
• Thijs ten Raa
• Tilburg University
• the Netherlands
• tenRaa_at_UvT.nl

2
Use and Make Matrices

• uij represents the amount of commodity i used by
  industry j
• vij represents the amount of commodity i made by
  industry j
• vij - uij is the net output of commodity i
  produced by industry j
• Summing over industries Gross Domestic Product
  (GDP)
• Summing over commodities Gross Domestic Income
  (GDI)
• Leontief Balans narodnogo khoziaistva SSSR
• metodologicheskii razbor rabotii TSSU
• Planovoe Khoziaistvo 12, 254-58 (1925)

3
Input-output coefficients

• U AV e
• Regress the inputs on the outputs
• Estimate the coefficients, including their
  confidence intervals
• Need at least as many observations (firms or
  industries) as commodities
• Published use and make tables have less
  industries than commodities
• Then how construct input-output coefficients?

4
IO Analysis without the A-matrix

• Productivity analysis
• Find potential output preserving the composition
  of final demand

5
The Lagrange multipliers

• Tell by how much potential output increases if
  you add a unit to the factor constraint
• Hence they are the factor productivities
• Add over factors (Total) Frontier Productivity
  FP
• Its growth rate can be seen to be equal to the
  residual between potential output growth and
  factor input growth
• It can be decomposed in industry Solow Residuals
  plus the terms of trade effect FP SR TT
• Total Factor Productivity growth TFP is the
  residual between actual output growth and factor
  input growth
• TFP FP EC SR TT EC, where EC
  -(du/dt)/u

6
The Canadian economy

1962-1974 1974-1981 1981-1991
SR 1.7 -1.3 -0.3
TT 0.7 0.5 3.8
EC -0.6 0.9 -3.7
TFP 1.8 0.1 -0.1
7
Further IO Analysis without the A-matrix

• Impact of free trade Comparative advantage and
  adjustment
• Efficiency analysis of firms, industries and the
  national economy
• Measurement of competition and its effect on
  performance
• Neoclassical economists argue it is positive,
  Schumpeter argues it is negative. The evidence
  is insignificant.
• IO Analysis decomposes departures from
  competition in labor rent and capital rent.
  Opposite effects!
• ten Raa The Economics of Input-Output Analysis
• Cambridge University Press 2005