Mura - Input-output

Input-Output Model URP 6200

Joseph Zamora

Input-Output Analysis

•Wassily Leontief

b. 1906

•Nobel Prize, 1973…for the development of the input output method and for its application to important economic problems.

x = (I-A)-1 y

Input-Output Basically Described:

• Large tables of data that describe the interconnectedness of the industries, households, and government entities in an area… the output of an industry will appear as the input of other industries.

• This helps us to track the flow of money from one entity to the next

Economic Modeling Specialists, Inc. (2008) Practical Input-Output Modeling for Regional Development.

www.economicmodeling.com/resources/wpcontent/uploads/2007/09/ pwp_practical_inputoutput_modeling.pdf

http://www.economicmodeling.com/resources/wp-content/uploads/2007/09/bpwp_practical_inputoutput_modeling.pdf





Input-Output Precisely Defined:

• IO models describe both the transactions between the region and the rest of the world among activities within the region.

• These models produce a multiplier index that measures the total effect or impact of an increase in demand on employment or income.

• They can be used for predicting and forecasting the impacts of potential future performance of a regional economy & changes in inter-industry transactions.

Stimson, R.J., Stough, R.R., Roberts, B.H. (2002) Regional Economic Development: Analysis and Planning Strategy.

Springer-Verlag Berlin Heidelberg

Practical Uses:

• Descriptive – can reveal knowledge about an area’s economy that would be impossible to get otherwise.

• Forecasting – estimate total impact of certain events or policy changes

• Assessment – evaluate and assess specific goals, scenarios, etc

• IO is used to identify the best approach !!

Simplified Circular Flow View of The Economy

BusinessesHouseholds

Goods & Services

$$ Consumption Spending (Yi)

Labor

$$ Wages & Salaries

Businesses

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)

Households sell labor & other

inputs to business as inputs to production

Households buy the output of business: final demand or Yi

Perlich , P. (2008) University of Utah: PowerPoint presentation http://www.business.utah.edu/~bebrpsp/IO/IO.ppt

http://www.business.utah.edu/~bebrpsp/IO/IO.ppt

What about Equilibrium?

• Consumer sector regarded as production sector – (inputs – consumption & outputs - labor)

• In this closed system, final demand, employment and wage rate are treated as unknowns

• Their equilibrium values are solved simultaneously with the rest of the variables

• This is a model that simultaneously solves a system of equations involving all prices and all quantities in an economy

• Includes impact of demand on supply and vice versa

Yan, C.S. (1969) Introduction to Input-Output Economics. Holt, Rinehart and Winston

Foundation: a set of accounts

• Intermediate – private business activities within the region

• Households – individuals/families residing in area

• (Buyers of consumer goods & sellers of labor)

• Government – state, local & national public authorities

• Outside world – activities and individuals outside the region

• Capital – the stock of private capital

Hoover, E.M. (1971) An Introduction to Regional Economics. New York: Alfred A Knopf

3 Basic Components of Input-Output Models

• Transactions Table - shows the monetary flows of

goods and services in a local economy

• Direct Requirements Table - the purchases of

resources (inputs) by a sector from all sectors to produce one dollar of output

• Total Requirements Table – the multipliers are drawn

from this table

Transactions Table Flows

• Total outlays = Total output

• Intermediate purchases - goods and services purchased and used in the local production process

• Final demands - purchases for final consumption

• Final payments - payments for inputs outside intermediate production process

Stimson, R.J., Stough, R.R., Roberts, B.H. (2002) Regional Economic Development:

Analysis and Planning Strategy. Springer-Verlag Berlin Heidelberg

Predictive Use of Input-Output Analysis

• The economy and certain impacts are tracked

• The multipliers are derived only from local transactions

• Multiplier – tells us how much of an increase in total regional income (or sales, jobs) to expect as a result of each additional dollar of export sales or income etc

Three Types of Multipliers

1. Output

2. Employment

3. Income

How to Use IO

Step 1 - Use IO to start discussion

What’s the region’s economic base?

What industries are the region’s top performers?

Step 2 – Translate policy issues into direct effects

How many jobs are being gained/lost?

Step 3 – Enter direct effects into IO Model

What are the ripple effects across the economy?

Step 4 - Interpret Total effects

What should be done?



Chain of Effects

• Multipliers describe “chain of effects”

• This will continue until there are demand leakages $ leaves the region

• The total effect will be no more than 2 or 3 times the size of the initial demand increase

• Direct – directly affected by business activity/development

• Indirect – impacts caused by inter-industry exchanges

• Induced – impacts created by household spending of those directly and indirectly employed by the industry/development



Measuring the Impact of Newport News Shipbuilding to the Virginia Economy

• Newport News Shipbuilding (NNS) is VA’s largest manufacturing employer

• NNS performs design, construction, overhaul and refueling of nuclear powered aircraft carriers and submarines for US Navy


• We use input-output analysis to measure economic impacts in terms of employment, personal income, and state & local taxes

• This analysis is for 1996, with forecasts through 2020 assuming 1.5% growth in employment annually

(1997-2000)

• Direct, Indirect & Induced effects are measured


• 45,516 Virginia jobs attributed to NNS in 1996

• Individuals in these jobs earned over $1.5 Billion in wages, interest and dividends in 1996

• Employers tied to NNS disbursed over $1.5 Billion in wages and benefits for these jobs

• NNS business activities resulted in $107 Million of Virginia business taxes

• In addition, Virginia also received $63 Million in state and local income tax in 1996






• A Step Further…

• In 1998 a new econometric input-output model was developed that could run in a windows environment

• New features made it possible to rapidly simulate the effects of alternative policies and/or investment strategies on the economy

• Econometrics - the application of statistical methods to the empirical estimation of economic relationships

• The end result a dynamic capacity for economic forecasting and impact analysis


• Step 1 – National factors provide regional demand increase

• Step 2 – Changes in output take place• Reflects “technical change” – dynamic, not static so overcomes major IO criticism

• Step 3 – Changes in output, change demand for labor• Employment & labor determine new levels of population

• Step 4 – Total personal income determined

• Completes 1st set of internal demands, originating externally

• Step 5 – New higher wages & salaries are spent, local business investment & govt spending

• 2nd round of internal demands


• Steps 2-5 are repeated until new changes in economic activity have been exhausted

• This completes the model sequence for 1 year

• This same process is then used to forecast each year through 2014











Integrating Qualitative and Qualitative Analysis

• Major challenge is how to incorporate political and other factors

• AHP – Analytical Hierarchy Process – popular tool for multi-objective planning (since 1970’s)

• Incorporates judgments and personal values in a logical way to rank alternatives

• DSS is a (shift-share) input-output model that enables the choice of the best alternative, according to specific objectives

• Basically, you can maximize the utility of both economic and sociopolitical components

• (We can use this to develop double & triple bottom-line projects!!)







Download these files (here)

• Matrices & Input-Output Model Tutorial

• Practical Input-Output Modeling for Regional Development (www.economicmodeling.com)

• The Hawaii Inter-County Input-Output Report

• The Hawaii Inter-County Input-Output Condensed Final Spreadsheet

• The Bureau of Economic Analysis - Regional Multipliers from the Regional Input-Output Modeling System (RIMS II):

A Brief Description (www.bea.gov)

• The Bureau of Economic Analysis - Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System

http://cid-ee4ebe962e2a0dcf.skydrive.live.com/self.aspx/Input-Output Model

http://www.economicmodeling.com/

http://www.bea.gov/

Conclusion

• IO helps to evaluate, predict & assess goals and policies in an inter-connected system of sectors / industries in an economy

• When combined with qualitative frameworks, a dynamic, transparent and powerful tool is utilized to assist decision-making across multiple objectives

• THANK YOU

References• Hoover, E.M. (1971) An Introduction to Regional Economics. New York: Alfred A

Knopf

• Shaffer, R., Deller, S., Marcouiller, D. (2004) Community Economics: Linking Theory and Practice. Iowa: Blackwell

• Stimson, R.J., Stough, R.R., Roberts, B.H. (2002) Regional Economic Development: Analysis and Planning Strategy. Springer-Verlag Berlin Heidelberg

• Yan, C.S. (1969) Introduction to Input-Output Economics. Holt, Rinehart and Winston

• Economic Modeling Specialists, Inc. (2008) Practical Input-Output Modeling for RegionalDevelopment.www.economicmodeling.com/resources/wpcontent/uploads/2007/09/b pwp_practical_inputoutput_modeling.pdf

• Bureau of Economic Analysis. (2008) Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II)

http://www.bea.gov/scb/pdf/regional/perinc/meth/rims2.pdf

• Liu, T.E. (2008) The Hawaii Inter-County Input-Output Report. Department of Business, Economic Development and Tourism STATE OF HAWAII. http://hawaii.gov/dbedt/info/economic/data_reports/2002_Intercounty_I-O

• Perlich , P. (2008) University of Utah: PowerPoint presentation http://www.business.utah.edu/~bebrpsp/IO/IO.ppt










http://www.bea.gov/scb/pdf/regional/perinc/meth/rims2.pdf

http://hawaii.gov/dbedt/info/economic/data_reports/2002_Intercounty_I-O



http://www.business.utah.edu/~bebrpsp/IO/IO.ppt

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Mura - Input-output