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Lecture 11: Input-output table: making of and analysis with Advanced Macroeconomics M.Sc. Programme in Environmental and Natural Resource Economics 1/2007 Content • Basic concepts– Rationale – Uses • • • • Mathematical structure Construction Link with national income account Analysis with I-O table consumption production 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=service Each selling and buying from each other Also some final consumption of output Production requires both primary and intermediate inputs So, how does the balance look? sector Ag Man. Serv. Total Final demand 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 +f1 X2 = X21 + X22+X23 +f2 X3 = X31 + X32 +X33 +f3 By 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 = Saij*XJ + fi, for i =1,2,3 In matrix form, it is X = AX + F See how much simpler it is!!! Mathematical structure (5) Then what? Solve the equation, at least simplify— (I-A)X = F Then, X = (I-A) –1 F So, 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 table Agriculture:from 001 to 16 x 16 Sectors 001Agriculture (001-029) 26 x 26 Sectors 001Crops (001-017, 024) 58 x 58 Sectors 001Paddy (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: Row/column/cell entry at different prices 001 001 9678269 9678269 0 0 2564 337 024 001 10712840 10712840 0 0 0 0 025 001 5280 5280 1264 0 240 0 027 001 10230 10230 1618 1117 341 0 074 001 67650 67650 1600 246 610 0 078 001 12540 12540 976 1015 196 0 079 001 1155 1155 97 157 21 0 085 001 17410618 17410618 2532964 1597516 1239893 10931814 Analysis • What kind of questions to ask? • Eg. Multiplier effect of increased autonomous expenditure • Mathematically, DX = (I-A) –1 DF • 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