Input-Output models JF Nadeau 13/09/2023 20265052025 Mn) a.Introduction We are familiar with the definition of Gross Dome: Product (GDP): = YSC+I+GHX-M This definition represents all spen Canadian economy. g for final/ultimate consumption in the This is just one particular way to measure GDP. which more broadly is defined as ‘+ The total value of output produced less intermediate consumption, ie the value added. By intermediate consumption, we mean what is used as input to produce something that will be sold again afterward + for example, ifthe retail price of a computer is 1000$ and we needed to purchase 500$ of electronic components to assemble it, then 1000$ is the value of production (gross output) and 500$ is the intermediate consumption. The Value Added (VA) in the production and sale of computer is 1000 — 500 = 500s. = Then, GDP = OVA * Input-Output analysis is mostly focused on this notion of intermediate consumption. ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) 21susan 208 om oat nt = Textbook: Miller/Blair Input-Output Analysis, ch.2.. ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri)Input-Output (Leontief, 1O) models = Objectiv. nalyze the interdependence of industries in an economy In its most basic form, an IO model just a system of linear equations + Thus, just linear algebra and matrix representation Each equation describes the distribution of an industry's product throughout the economy 10 models used at local, regional, national and even international level + We use them to study the economic impacts of free-trade agreement + Growing use to study the impact of economic policy on environmental pollution ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) watsusan 208 om sonst moat) 10 model framework = InalO model, we analyse industrial sectors as producers AND as consumers of the goods and services produced by other industrial sectors as input in their production process + ie how industrial sectors use the what is produced by other industrial sectors to be able to produce their ‘own output = This information is summarized in an intet dustry transaction table Interindustry transactions sushenaDacarntsOtawaMacNECOO152202F oar aep202 162023 Mr) sosusan 208 om sonst moat) 10 model framework Interindustry transactions = Rows describe the distribution of a producer's output throughout the economy '* Rows describe who consumes the production of a given sector = Columns describe the composition of inputs required by a particular industry to produce its output + Columns give us the recipe to produce the output of a given sector = Note that we easily see GDP both from a spending and income point of view in this representation sushenaDacarntsOtawaMacNECOO152202F oar aep202 162023 Mr) wotwas 2a om sonst moat) Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn a1van. 236 Pw sonst moat) Mathema = Note that with an industrial sector being both a producer and a consumer, the interindustry transctions of the matrix (darker area) will always be a square matrix = Mathematical structure of IO model is simple:a system of n linear equations in unknown ‘+ matrix representations can readily be used! Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn stMathematical structure = Start with a IO model of the national economy ‘= Regional models add a little bit of complexities that we will not cover in this introductory class = Economic activity separated in a number n of producing sectors, either widely defined (manufacturing) or very refined (tungsten steel production), depending on the needs of the model «For each sector 7 as a producer, we measure how much much of their production is purchased (in monetary value) by all the n sectors of the economy as consumers, including itself. ‘+ Fora given period of time period (usually a year) and in monetary value + Utimately, we care about quantities but measurement problems force us to use monetary values = For example,a Tesla and a Nissa Micra are 2 cars (quantities), but their «value» as a car is not the same + Monetary value allows us to differentiate between these 2 cars ‘+ Inflation is a bit of @ problem, but nothing that cannot be dealt with, however imperfectly ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) 01was 2a OM sonst moat) Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn stMathematical structure out simplified matrix = Call z,; the value of output é purchased by sector j for its own production + Obviously, zi depends on total output of sector j, which we call :; + Example: quantity of steel (sector i) purchased by auto sector (sector j), 2, depends on total auto production, 2; = We call f; the final demand for output i by households, governments, and other countries (export) + Initially, we consider f; is exogenous to simplify things sushenaDacarntsOtawaMacNECOO152202F oar aep202 162023 Mr) 8Mathematical structure oat nt simplified matrix With n sectors in the economy, and ; the gross production of sector i, we have Ba Hataigte tint h= ay t hi a ‘+ Important: sector i sells to itself + With few and large sectors, pretty reasonable Value added is the «scientific» name for labour income and profits... + Profits are a residual! if output (sales) is 100$, I spent 50$ on intermediate consumption and 40$ on wages, then my profit is necessarily 100 — 50 — 40 = 10$ So for each sector, total output (production) is equal to total outlays (spending) sushenaDacarntsOtawaMacNECOO152202F oar aep202 162023 Mr) westwas 2a OM sonst moat) Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn wwMathematical structure a= aitaat- taint h= Dagth a = 23 represents interindustry sales by sector i, or intermediate sales = This equation represents how sector i output is distributed across the economy. = For all n sectors, we will have a= aate.tagte tanath B= Ait. tagt-.. taint h Bp = tai tee ting tee + Zan + fo ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) westIn matrix form = Define 2 fh aa Zin 1 x= , f= » Z=]: 2, 2], ig fa znd nn 1 7 a a a = Then we can simplify our system as x=Zi+f = with vector i a summation vector ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) sotThe summation vector A summation vector adds together all the elements of a row of a matrix when it post-multiplies that matrix Ziij- c wr or = Asummation vector adds together all the elements of a column of a matrix when it pre-multiplies that matrix iv iv Z= ec Soy = important: transpose the summation vector to be conformable with the matrix when pre-multiplying = Assume the following Z matrix 3°12 4 Zz 29 8 4147 ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) wotwas 2a OM sonst moat) Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn watvan. 236 Pw sonst moat) Exemple d’un vecteur de sommation 2 ee watrix(e(,254559,9)86,6,8,7),33) # metre Aled by column! ee mtrix(e(0).3.1) [fle (“The 2 mini we Dal 62 63) wt] 3 2a mi) 2 3 8 #3) 4 147 bal ae (2) [19 ## [2,] 19 a8 (3,125 [lv (31 "Vector 4 presmuitipiies® (al £2] Ll wt] 7 9 735 “39 Sh sven DacurentsUOhawae BE COOS2202F at Tame 2024 45652023 Ml)susan 208 om oat nt In matrix form = We return to our example = Column j of matrix Z 2nj represents sales to sector j, or the purchase of intermediate production inputs by sector j. ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) 191van. 236 Pw sonst moat) In matrix form = Obviously, sector j will also need capital and labour input, which we call primary inputs. = The value of primary inputs is called value added and is equal to GDP in national accounts. PIB/GDP Se ssUsenseraDeeurentsUOeawata=eECOS152202 aT ep 2029 65092025 Mn astsonst moat) In matrix form «= In reality, many inputs are imported from abroad Li intrant travail / labour input nj intrant capital / capital input Sectors — Final Total € j exportations / exports 1 Demand Output (x) 1 mam 72 4 81 et x 2 zai zon cn in. gn ey “2 Value Added (v') (Hb Wic 4 tg Ie L mm nc om NG NE N Tmports my m2 me mp mG mE M Total Outlays (x’) y om C 1 GE x input-output government = mg is imports for re-exports ‘sic eeeheneDacaratsOtensMaeVECOO152202Fo ei Aanp20 AS62023 Mri) Important: n; represents profits and also includes tax and subsidies to/from