Input-Output Economics

Table of Contents

I Aim of the study/paper

II Introduction

III The Beginning of Input-Output Economics

IV The Leontief Paradox

V The Input-Output Model Today

VI Calculation of the Input-Output Table Multipliers

VII Computer Program for the Inverse of a Matrix

VIII Regional Input-Output Analysis

VIIII The Use of Input-Output Analysis with Regard to the Environment

IX Conclusion

X Bibliography

List of Illustrative Material

I Input-Output Table for the US Economy in 1947

II Table: Labour and Capital needed to reduce exports and increase i

mport substitutes by $1 million in the United States in 1947

III Transaction Table

IV Direct Requirements Table

V Total Requirements Table

VI Output, Income and Employment Measures from Input-Output Analysis, an example

VII Example Questionnaire used in the Survey Approach to Input-Output Analysis

Abstract

The aim of this study, and thereby this paper, is to discover the field of input-output economics as an integral component of the wider trade theory.

We start therefore, with an introduction to the discipline, its history and its place today within the global economic context.

We move on to explain in detail the calculation of an input-output table as it is used for the total output calculations of a national as well as a regional economy. The concept of the multiplier will also be discussed here.

To conclude, we will present an example of the application of input- output economics to a specific, current issue namely, the environment.

An Introduction

The wider discipline of trade theory within which we find the field of input-output economics consists of four broader areas. Input-output economics, based on the Heckscher-Ohlin theory and defined by the findings of Wassily Leontief forms the biggest most well known part. However, there are other areas which deserve to be mentioned in order to round out the discussion. These other areas are the Ricardian model of comparative advantage, Posner's technological-gap theory and Vernon's product life-cycle theory.

The Ricardian model, which is the next most important model to that on which input-output economics is based, will be described in some depth for the sake of comparison and to give an alternative insight into the discipline of trade theory.

The Ricardian model then, suggests that labour costs will be the determinant of trade: the country with the lower labour cost in the production of a good will be the exporter of that commodity. This theory was tested in 1952 by MacDougall who used data on 25 products from 1937 to compare labour productivity and exports for the United States and Great Britain. In this way, MacDougall tested whether their relative exports to third countries were connected with their labour productivities. The results which MacDougall found were inconsistent with the simple Ricardian model. However, they are generally interpreted as supporting a more general "Ricardian" argument that differences in relative labour productivities are the determinant of comparative advantage. As long as these differences are due to technology, the model exists as an alternative to the model described previously.

MacDougall found that wage rates in the manufacturing sector were roughly twice as high in the United States as in Britain. Therefore, the United States should be the dominant exporter in markets where her labour productivity was more than twice as high as in Britain. Britain, on the other hand, should be the dominant supplier in any line of production where her labour productivity was more than 50% of the American. Whenever labour productivity in US industry was twice that of its British counterpart, we should expect export shares of the two countries to be roughly equal in third markets.

In most cases, the ratio of US to British exports was higher whenever her ratio of labour productivity was higher. However the dividing line between British and US exporters in third markets was not where American productivity was twice as high as in Britain. In these markets, Britain still had a comparative advantage. The American markets needed a productivity advantage of roughly 2.4 to be even with the British in third markets. The basic explanation MacDougall suggested for this phenomenon was that imperial preferences and other tariff advantages that were enjoyed by countries which were close to her politically could be possible explanations for the advantage that Britain at the time enjoyed in her export markets. Other reasons put forward were that Britain had been the pioneering industrial nation and that her dominance in international finance and her commercial reputation still gave her certain advantages which were difficult to measure but which were still important.1

The Beginning of Input-Output Economics

Although the French economist FranÐ*ois Quesney had formulated a "tableau иconomique" in 1958 which depicted the workings of a farm and Leon Walras and other classical economists formulated general equilibrium models of the economy, none could employ their findings to the solution of problems. Therefore, the beginnings of the discipline of input-output economics are most often referred to as a 1951 paper written by Wassily Leontief.

In this paper, Leontief made a relatively simple point. The boom time after the second world war had brought with it an indigestible amount of facts. To this Leontief said "we have in economics today a high concentration of theory without fact on the one hand, and a mounting accumulation of fact without theory on the other"2 . He went on to state that the collusion of the two was the most important task at hand for economists of the day. He made this collusion possible through the