Lecture 11: Input-output table: making of and analysis with Advanced Macroeconomics M.Sc. Programme in Environmental and Natural Resource Economics 1/2007.

Lecture 11: Input-output table: making of and analysis with

Advanced MacroeconomicsM.Sc. Programme in Environmental and

Natural Resource Economics1/2007

Content

• Basic concepts-– Rationale– Uses

• Mathematical structure

• Construction

• Link with national income account

• Analysis with I-O table

production consumption

income

The circular flow of income-in an economy

Basic concepts

• Rationale– Something to link up all the elemetns of the

economy-production/income/expenditure

• Uses- something to help analyse scenarios– Predicting the future– Predicting impacts of changes in exogenous

variables-

Mathematical structure

• A matrix format-row and column

• Row for disposal, sale from i to joutput

• Column for use, purchase by j from i input

• Matrix algebra reduces notation

• Balance between row and column totals, hence account

Mathematical structure(2)

3 sectors-1=agriculture, 2=manufacturing, 3=serviceEach selling and buying from each otherAlso some final consumption of outputProduction requires both primary and intermediate inputsSo, how does the balance look?

sector Ag Man. Serv. Final demand

Total

Ag. X11 X12 X13 f1 X1

Manuf. X21 X22 X23 f2 X2

Serv. X31 X32 X33 f3 X3

Labour L1 L2 L3

total X1 X2 X3

Can you write the equations out? In matrix form?

Mathematical structure(3)

The equation(s) system is:By row: X1 = X11+X12+X13 +f1X2 = X21 + X22+X23 +f2X3 = X31 + X32 +X33 +f3By column:Can you try?What about the matrix form?

Mathematical structure(4)The matrix form needs some more symbols.

Let aij = Xij/Xj

Then, rewrite the equation by row as:

Xi = aij*XJ + fi, for i =1,2,3

In matrix form, it is X = AX + FSee how much simpler it is!!!

Mathematical structure (5)

Then what?Solve the equation, at least simplify— (I-A)X = FThen,

X = (I-A) –1 FSo, if we know F and A, we can also know X

Link with national accounts

• National accounts: Production-income-expenditures

• Where are they in the I-O Table?

• Production-gross output (IO) vs. value added (NA)-so, has to deduct intermediate inputs from gross output

• Income-as share of primary inputs (IO) and functional incomes (NA)

• Expenditures –same in IO and NA

• Advantage of IO – having all three at the same time

Construction

• Data requirement• Sector classification• Control totals• Flows between sectors• Balancing act between row and column

totals• Updating with RAS-this is for the advanced

student only!!

Examples:

Sector classification: in 1998 IO table, 180x180 sectors, but can be reduced. See Convertor tableAgriculture:from 001 to 16 x 16 Sectors001Agriculture (001-029)

26 x 26 Sectors001Crops (001-017, 024)

58 x 58 Sectors001Paddy (001) 002Maize (002) 003Cassava (004) 004Beans and Nuts (006) 005Vegetables and Fruits (007-008) 006Sugarcane (009) 007Rubber (Latex) (016) 008Other Crops (003, 005, 010-015,017, 024)

Example:

001001 9678269 9678269 0 0 2564 337

024001 10712840 10712840 0 0 0 0

025001 5280 5280 1264 0 240 0

027001 10230 10230 1618 1117 341 0

074001 67650 67650 1600 246 610 0

078001 12540 12540 976 1015 196 0

079001 1155 1155 97 157 21 0

085001 17410618 17410618 2532964 1597516 1239893 10931814

Row/column/cell entry at different prices

Analysis

• What kind of questions to ask?

• Eg. Multiplier effect of increased autonomous expenditure

• Mathematically,

X = (I-A) –1 F• Eg. Effect of price changes

• Analysis by column!!

Application: Tourism

• What is the effect of SARS on tourism and GDP?

• What do you need to know in order to analyse this question?

• Given Tourism IOtable

Coral reef TOURISM

• Tourism IO table

• Change in visitor numberfall in tourist expenditure

• Multiplier effect on GDP

• Use the tables provided in file TourismIO.xls