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World trade perspective interdependencies: a New Zealand David Gillmore and Phil Briggs A key determinant of New Zealand’s growth is its trade with the rest of the world. We have developed a world inputoutput table to investigate the way in which New Zealand and Australia depend on the rest of the world, and to look at the role of demand in China, Japan, the US, and the euro area. We show how higher demand in one economy affects production in another economy both directly, through its higher demand for final products, and indirectly, via its higher demand for intermediate products and its impact on production and demand in other economies. We highlight the impact of US demand on other economies and demonstrate the importance of Chinese and Australian demand on New Zealand. 1 Introduction on emerging Asia both directly and via its dependence on International trade matters for long-run growth. This is Australia. And, given developing-Asia’s dependence on the especially true for small open economies such as Australia United States and euro area, both New Zealand and Australia and New Zealand. have indirect linkages to these regions via emerging Asia. The openness of one country (the amount of international Figures on the arrows are the share of an economy’s exports trade a country engages in as a proportion of its GDP) is to trading partner countries/regions, while those in square a measure of a country’s inter-relatedness with the rest of brackets are an economy’s total exports as a percentage of the world. Given this ratio, a country’s export shares (the its GDP. percentage of its exports going to particular countries) can indicate the dependence on, and vulnerability to, specific countries. These measures therefore indicate the magnitude of the benefit each country may gain from the other’s growth as well as revealing the extent of vulnerability to negative shocks from the other. Why use input-output analysis? While the export shares shown in figure 1 indicate how concentrated each country’s exports are on particular trading partners, they give an incomplete picture of indirect trade linkages and vulnerabilities. A shock to one For example, figure 1 illustrates how New Zealand is particular country affects output in other countries, not dependent on Australia and emerging Asia, based on only through direct bilateral trade, but also indirectly via merchandise export shares. Australia is highly dependent output fluctuations in other countries (Ohyama 2004). on emerging Asia, which in turn is very dependent on both To gain a better understanding, what is also needed is (i) the US and euro area. Thus, New Zealand is dependent an understanding of intra-country output, (ii) how this Figure 1 Merchandise export shares illustrate inter-linkages1 1 ! In Figure 1, emerging Asia refers to China & Hong Kong, three NIE countries (Korea, Taiwan and Singapore) and ASEAN-5 (Philippines, Vietnam, Thailand, Malaysia and Indonesia). Trade figures for emerging Asia are based on extra-region trade only (i.e., intra-regional trade is not included in total trade). Figures are based on 2006 data. Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 35 relates to trade, and (iii) third-country effects. One way of macro-level table. However, there is an important way that analysing these inter-linkages between countries is to use an it differs from the Asian International Input-Output tables. international input-output table. While the Asian International Input-Output tables include Input-output analysis was developed by Wassily Leontief in the 1930s to study the inter-relationships between different sectors of an economy. The analysis centres on a matrix exogenous categories; four countries and an item for the rest of the world; our model contains no exogenous countries and the rest of the world item has been made endogenous. where suppliers of goods are represented by rows and users The input-output framework can show the effects of a shock of goods by columns. One application of this method is to to final demand in one country on production, trade, and show the impact of a change to final demand on all supply income in other countries. It can distinguish between the chains within the economy. It is also used by government direct effects of such a shock on output in other countries statistical agencies in constructing national accounts. and the indirect effects that result from the initial shock. 2 An international input-output table is a representation of total world output, showing the interaction between countries of interest. It is based on a matrix of trade flows between countries as well as internal demand within countries, both of which are divided into final and intermediate demand. However, it is a static approach, in that it does not take into account the changes in employment, prices and spending patterns that would occur within a general equilibrium model. Box 1, overleaf, covers the input-output table in more detail. Usually, output is broken down by industries in many countries, thus revealing the inter-industry linkages within and between countries.3 A well-known example of an 2 Constructing the world inputoutput table international input-output table is the Asian International Input-Output table developed by the Institute of Developing Constructing our world input-output table involves four Economies at the Japan External Trade Organization (IDE- steps: JETRO) in Japan. 1. We derive a matrix of goods and services trade flows, using data from the IMF, OECD and UN. A major drawback of international input-output tables is that they are both time-consuming and expensive to 2. We use country-level input-output tables (from the construct. So, by the time they are published, the data that OECD and countries’ statistical agencies) to derive a they contain are some years old. For example, the latest IDE- set of parameters regarding tax rates, the ratio of value JETRO table is for the year 2000. added to GDP, the ratio of intermediate goods to value To overcome this problem, economists have combined these added, and the ratio of imported intermediate goods to tables with more recent data to estimate updated input- total imports: output tables. However, as the estimation procedure cannot 3. We use these parameters – in conjunction with IMF accurately update the industry-level relationships, these data on GDP and trade – to produce a 2006 aggregated updated tables are based on macro-level data (aggregate input-output table for each country, expressed in US output and trade data) rather than industry-level data).4 dollars.5 The world input-output table used in this paper is also a 4. We combine these aggregated input-output tables with our matrix of goods and services trade flows to form our 2 4 3 36 For more detailed descriptions of input-output analysis, see Wixted et al. (2006, Section 2) and United Nations (1999). See Claus & Li (2003) for a New Zealand example. Recent papers using estimated macro-level AIIO tables include Sasaki & Ueyama (2009), Pula & Peltonen (2009), Mori & Sasaki (2007) and Takagawa & Okada (2004). world input-output table. 5 The aggregated input-output table includes totals for: intermediate supply, final demand of locally produced products, imports of intermediate products, imports of final-demand products, tax on intermediate products, tax on final-demand products, and value added. Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 Box 1 In this paper, when we talk about a shock to domestic final Input-output methodology demand in one country, we change the items circled in Table 1 shows a simplified three-country representation of the world input-output table used in this paper. It represents the production and demand of countries A, B, red – that is, the demand of residents of country A, which is satisfied by final goods produced both domestically (faa) and imported from other countries (fba and fca). and C, divided between intermediate demand and final The lower three rows of the model include tax on demand. These two categories relate to the destination intermediate demand and final demand, value added and country, i.e. they cover the intermediate demand products total inputs. The table is symmetric. So total inputs (xa, and final demand products that are required by the the sum of the first column in the table above) equals destination country. the respective total output (the total of final demand and In both internal demand and final demand matrices, the intermediate demand at the right of the table). items on the diagonals represent production that is sold In the input-output framework, total demand for output domestically. Off-diagonal items of the rows represent can be expressed as: exports, while those of the columns represent imports. AX + Y = X The table decomposes output into intermediate demand where A is a matrix of input coefficients aij= zij/xj and X is and final demand. Total output of country A is represented the vector of total outputs for each country (the xa and xb by xa. This is the sum of those items shaded in grey: zaa is and xc in our simplified input-output table above), and Y the output of country A that is used domestically as input is the vector of total final demand for each country (the into other production; and zab and zac represent the outputs ya, yb, and yc above). AX equals the matrix of intermediate of country A that are exported to countries B and C where demand. Equation (1) can be rearranged as: they are used as inputs in production. Similarly, faa is the output of country A that is consumed domestically as final product, while fab is final product exported to country B. Finally, ya is the sum of the final-demand elements in that (1) X = [I – A]-1Y (2) where [I – A]-1 is known as the Leontief matrix. With a shock to domestic final demand in one country, row (faa and fab and fac). the values in vector Y increase. We use equation (2) to The columns within the intermediate demand matrix obtain a new value of total output (X). This step in effect represent inputs into production. For example, the column involves solving a series of simultaneous equations that circled in blue includes inputs for country A’s production satisfy the new final demand values (Y) and the input – zaa are inputs produced in country A, and zba and zca are coefficients of matrix (A). We are then able to calculate a imports of intermediate goods from countries B and C. new intermediate demand matrix, in which each element is zij= aij xj. This gives us an amended input-output table incorporating the impact of the shock to domestic final Table 1 demand. A typical world input-output table ! Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 37 Our world input-output table includes New Zealand and little or no added value. Thus, Singapore’s exports data (as 17 of its trading partners, plus a category for the rest of shown by the Direction of Trade Statistics figures) do not the world. Countries included are Canada, the US, Mexico, accurately reflect its own economic activity, and the data for the UK, India, Japan, China, Korea, Taiwan, Singapore, other countries’ imports from Singapore do not reflect the Philippines, true country of origin. We therefore re-allocated Singapore’s Vietnam, Thailand, Malaysia, Indonesia, Australia and New Zealand, while the euro area is included as one economy. Hong Kong is included within China. Most of these economies are in the Reserve Bank’s GDP-16 basket of countries. We include Mexico in order to have a complete picture of the North American Free Trade Agreement re-exports to its trading partner countries. A similar issue exists for Hong Kong’s trade data, where 95 percent of its imports from mainland China are re-exported. We overcame this issue by amalgamating Hong Kong and mainland China as one economy, ‘China’. countries and India because of its growing importance in the world economy. We used data for 2006 as that was the latest available year of services trade figures. Services trade flows data There is a severe lack of data on services trade flows between countries. To construct a matrix of services trade flows, we Merchandise trade flows data use data on bilateral flows where they exist, and estimate Using export data from the IMF Direction of Trade Statistics, we constructed a matrix of merchandise trade flows, which has exports represented by values in the rows, while imports are represented by the columns.6 However, there are two important data issues that must be addressed in constructing this matrix. The first issue relates to the lack of all other items. The existing services trade data falls into two categories. First, total exports and imports of services by country are published in the IMF Balance of Payments Statistics. Second, the UN and OECD publish bilateral services export and import flows, but for only a limited number of countries. data for Taiwan, while the second concerns re-exports from There are many inconsistencies between these UN and Hong Kong and Singapore. OECD figures and between export and equivalent import Because of the political status of Taiwan, the IMF includes no section for this country in its Direction of Trade Statistics. However, we were able to extract the Taiwan figures from the Direction of Trade Statistics CD-ROM. Taiwan is included figures.8 We therefore averaged the export and equivalent import figures (where they exist) for each of the OECD and UN data sets; we then averaged these average OECD and average UN figures. in the aggregate figures for the “Advanced Countries” category, and we simply calculated values for Taiwan exports as residuals (the difference between the aggregate “Advanced Countries” figures and the sum of the other However, given that the OECD and UN data do not cover all countries, it was necessary to estimate the missing data. We did this by estimating a second matrix for services flows, and then replacing relevant figures with the OECD/UN averages countries that make up that category).7 described above.9 This ensures that we capture some Because Singapore acts as a trading hub for the East Asian 8 region, a high proportion (47 percent) of its merchandise trade consists of imports of commodities or manufactured products that are re-exported to other destinations with 6 7 38 Oct 2009 CD-ROM – from the “Cross Country Matrix View” section. All figures are on an f.o.b. basis. As a crosscheck of this approach, we found that our export figures matched exactly Taiwan official export figures. Table 122 of the Statistical Yearbook of the Republic of China 2007 (Edition 2008) includes exports in USD to 10 of the 17 countries in our sample. 9 For example, the OECD figures for 2006: UK imports from the US is USD 28,535 million compared with US to UK exports of USD 52,604 million. Technically, we derived the second matrix by applying an algorithm to scale our merchandise trade matrix so that each country’s total services exports and service imports equal the figures from the IMF Balance of Payments Statistics. By basing this estimation on our merchandise trade matrix, we assume that services trade flows display similar patterns to merchandise trade. This assumption is consistent with findings that geographical distance is as important (or possibly more important) for services trade as for goods trade (Kimura & Lee 2004). Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 important bilateral services flows (such as the exceptionally both directly, through its higher demand for final products, high level of financial services trade in and out of the United and indirectly, via its higher demand for intermediate Kingdom) that would not necessarily be reflected in our products and its impact on production and demand in other second matrix. The final step was to adjust our estimates to economies. ensure consistency with the IMF country totals for services exports and imports. The effects of an increase in domestic final demand on output Completing the input-output table Figure 2 shows the impact of an increase in domestic final To complete our input-output table we use data from demand in each economy on the production (or total output) individual economies’ input-output tables. In particular, we in its own economy and in other economies. Each bar of use (i) percentage of total imports that apply to intermediate the chart represents the impact of a one-unit shock (of, say, demand, (ii) domestic intermediate demand (the diagonal one billion dollars) in that particular economy. The impact is values of the Intermediate Demand (ID) matrix), (iii) taxes measured in the same units. that apply to intermediate and final demand, (iv) value Figure 2 can be calculated in either of two ways. Firstly, it can added, and (v) total output. be done by recalculating the input-output table – adjusting From our goods and services trade matrix, we divide each the domestic final demand for the economy concerned, flow into intermediate products and final products based on recalculating the table and calculating the change to the the percentage of total imports that apply to intermediate total output column. Alternatively, it can be done using a demand for each country. We then calculate each economy’s procedure outlined by Mori and Sasaki (2007). This involves domestic final demand and taxes. The complete table is constructing a ‘production inducement coefficient matrix’ shown in appendix 2. which demonstrates the impacts of a one-unit increase in Two other points are worth noting: • Because the country-level input-output tables for eight of the countries show zero tax figures, we also set the tax figures in our table to zero.10 domestic final demand in each economy in turn. Such a matrix is shown in table A3.1 in appendix 3. From figure 2, we see that for most economies the largest impact of an increase in their final demand is on local production. This is particularly so for large and advanced • In order to include the rest of the world as an endogenous economies. On the other hand, most of the NIE and ASEAN-5 category, we assume the ratio of intermediate demand economies have a relatively high foreign impact – which is to total output is similar to the average of emerging/ developing countries. Figure 2 Total production inducement from a one-unit increase in domestic final demand 3 Results of the input-output analysis We use the world input-output table to investigate the way in which New Zealand and Australia depend on the rest of Units 3.0 Home economy Foreign economies 2.5 2.0 1.5 1.0 the world, and to look at the role of demand in China, Japan, 0.5 the US, and the euro area. We show how higher demand 0.0 in one economy affects production in another economy 10 These countries are the US, Japan, China, Philippines, Vietnam, Thailand, Malaysia and Indonesia. Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 39 consistent with the interdependent chains of production We can break down the impacts on foreign countries. across economies in the region.11 Taking China as an example, its one percent domestic final- But one country stands out – China. The impact of China’s domestic final demand on domestic production as a ratio of its impact on foreign production is significantly higher than that of other countries. China’s high domestic impact reflects both the size and dynamism of the domestic economy – an indication that China is not completely reliant on final demand in foreign markets. The size of China’s domestic economy appears more important than its exportled growth suggests. demand shock, which is equal to USD25.8 billion, results in its own domestic output increasing by USD56.9 billion and total foreign output by USD13.3 billion. A breakdown of this foreign impact (the red portion of the “China” bar in figure 3) is shown in figure 4. Note the high impact, in dollar terms, on Japan, the euro area, and the US, as well as the rest of the world. Figure 4 Impact on foreign output from a one percent However, we need to be careful when interpreting the data shock to domestic final demand in China presented in figure 2 and table A3.1. We can compare the USD billions impacts from a shock in one country on its own and other 3.00 economies (comparing the values within the columns of the 2.50 production coefficient inducement matrix), but comparing 2.00 the effects of shocks in different countries (comparing values 1.50 1.00 across rows in the production coefficient inducement matrix) can give a misleading picture. This is because the size effects 0.50 0.00 of the economies from which the shocks originate are not taken into account. Obviously, the large demand of the US and the euro area will have scale effects on world trade. Figure 3 shows the production (domestic and foreign) induced by an increase of one percent of domestic final demand in each economy. Here, we see the importance of the US and the euro area The impact on total output in each economy can be further broken down into direct and indirect effects. Figure 5 shows the initial direct effects on production, and the subsequent, indirect, effects on domestic intermediate demand and foreign intermediate demand for both Australia and New because of the size of their economies. Zealand. Figure 3 For New Zealand, the initial direct impact on output Impact on output from a one percent shock to (USD3.6m) is the amount of exports of final products domestic final demand from New Zealand in order to satisfy the rise in domestic USD billions 300 250 200 final demand in China. This rise in domestic final demand Home economy in China also generates additional economic activity both Foreign economies in China and in its trading partners. To supply inputs to 150 this additional activity, New Zealand exports additional 100 intermediate products to both China (USD11.2m) and its 50 trading partners (USD4.7m). Finally, the increase in activity in 0 New Zealand as a result of the rise of both final demand and foreign intermediate demand generates additional domestic 11 40 NIE (newly industrialising economies) are Korea, Taiwan and Singapore. ASEAN-5 includes Philippines, Vietnam, Thailand, Malaysia and Indonesia. demand for intermediate products (USD17.0m). Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 Figure 5 Direct and indirect impacts on Australia and New Zealand Australia New Zealand NZ AU USD millions 400 USD millions 40 350 35 300 30 250 25 200 20 150 15 100 10 50 5 0 0 China direct Other indirect China indirect AU domestic China direct Other indirect China indirect NZ domestic What is noteworthy about figure 5 is the difference in size impact on GDP.12 Output figures include the value of inputs between the direct impact on final demand and the total as well as value added and so are higher than GDP figures, output generated. In the case of the Chinese shock on New which are a measure of the value added alone and therefore Zealand, the effect on total output is ten times the size of reflect better the level of economic activity in an economy. the initial direct effect. Additionally, the total amount of exports generated (USD19.5m) is five times the size of those generated by the initial increase in final demand. Figure 6, overleaf, shows the impact on GDP of changes to domestic final demand in the US, the euro area, Japan and China.13 The first chart shows the prominent influence of US It is possible that the total indirect effects are being final demand on GDP in other economies, largely reflecting underestimated, because increases in final demand in each the size of the US economy. While the euro area is also a large country from a higher level of demand for intermediate economy, a one-percent shock has a lower impact on Asian products are not being accounted for in the input-output economies than the US. However, it has a larger impact than model. When we shock the model, final demand remains the US on the “rest of the world”, which includes eastern the same, except in the country being shocked. However, Europe and Russia, and is a sizable proportion of the world final demand could be expected to rise in each country, economy. given the additional income that would be generated by higher exports. We now focus on the impact of a separate shock in each economy on Australia and New Zealand. Figure 7, overleaf, It could be argued, though, that the indirect effects, even as highlights the strength of the influence of the US and shown here, are higher than they would be in reality. This is Australian economies on New Zealand.14 It also shows the because the input-output approach assumes that there are dominant influence of Japan and China on Australia. We no constraints to supply in meeting the demand induced by have also included the impacts on Japan and China, to the initial shock. Overall, the results from the input-output demonstrate US and euro area impact on these economies. approach should be seen as being indicative rather than definitive. Elasticities: the effects of an increase in 12 domestic final demand on GDP In the previous section, we have shown the impacts of shocks to domestic final demand on the output in other economies. 13 14 Input-output analysis can also give us an indication of the Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 In appendix 3, table A3.2 is the matrix of elasticities, where each cell is the percentage change to GDP in one economy as the result of a one-percent change to domestic final demand in another economy. The charts in figure 6 are constructed from the us, ea, jp, and cn columns in table A3.2. The charts in figure 7 make use of the data in the nz, au, jp, and cn rows of table A3.2. 41 Figure 6 Impact on GDP in other economies from a one percent shock to domestic final demand in the US, Euro area, Japan and China United States euro area % % 0.25 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 Japan China % % 0.25 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 Figure 7 The impact of one percent shock to domestic final demand in other economies on GDP in Australia, New Zealand, Japan and China Australia New Zealand % % 0.10 0.10 0.08 0.08 0.06 0.06 0.04 0.04 0.02 0.02 0.00 0.00 Japan China % % 0.10 0.10 0.08 0.08 0.06 0.06 0.04 0.04 0.02 0.02 0.00 0.00 42 Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 While figure 7 gives us the elasticities of a change to domestic 4 final demand in other economies on GDP in New Zealand Conclusion In this article, we have described the development and use and Australia, they do not take account of the actual growth of a world input-output table to better understand the inter- seen in individual economies in recent times. Figure 8 shows relationship of New Zealand and its main trading partners, real growth rates by region from 2006 to 2007. and the importance of demand from China, Japan, the US, Figure 8 and the euro area. Real GDP growth rates in each economy We have shown how higher demand in one economy affects (2006-07) production in another economy both directly, through its 14% higher demand for final products, and indirectly, via its 12% additional demand for intermediate products and its impact 10% 8% on production and demand in other economies. And we 6% have found that the total trade-related impact may be many 4% times greater than the initial direct effect would suggest. 2% 0% Our analysis has confirmed the importance of both the US and euro area domestic final demand as well as those of Japan and China within the world economy. It has also In figure 9 we adjust the shocks to domestic final demand demonstrated the huge influence of the Chinese and to represent these growth rates. Note, though, that our Australian economies on New Zealand economy. procedure assumes that the shock to each country occurs exogenously – independently from shocks in the other economies. References Claus I and K Li (2003), “New Zealand’s production structure: Figure 9 is therefore only illustrative of the influence of the growth in each economy on Australia and New Zealand. We an international comparison”, New Zealand Treasury Working Paper, 03/16. see the dominant impact of the growth in China’s domestic final demand on Australia. For New Zealand, China and Australia are the dominant economies. Kimura, F and H-H Lee (2004), “The gravity equation in international trade in services”, European Trade Study Group Conference, University of Nottingham. Figure 9 Impact of 2006-07 growth in other economies on GDP in Australia and NZ Australia New Zealand % % 0.30 0.30 0.25 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 43 Mori, T and Sasaki H (2007) “Interdependence of production Appendix 1 and income in Asia-Pacific economies: an international Abbreviations used in tables input-output approach”, Bank of Japan Working Paper, ca Canada us United States mx Mexico gb United Kingdom ea euro area (includes the 12 countries that were its members in 2006: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) decoupled? An analysis of production and trade linkages in India using the Asian international input-output table”, European jp Japan Central Bank Working Paper, 993. cn China (includes mainland China and Hong Kong) kr Korea tw Taiwan sg Singapore ph Philippines vn Vietnam Takagawa I and T Okada (2004), “Estimation of input th Thailand coefficients of the extended international IO table and analysis my Malaysia of interdependency in the Asia-Pacific economy”, Bank of id Indonesia Japan Working Paper Series No. 04-J-6 (in Japanese). au Australia nz New Zealand row Rest of the world Series No. 07-E-26. Ohyama S (2004) “Evolution of output multipliers: An analysis with a particular emphasis on Asia”, Bank of Japan Working Paper Series No. 04-E-12. Pula, G and T A Peltonen (2009) “Has emerging Asia Sasaki, H and Ueyama S (2009) “China’s industrial structure and its changes in recent years: An analysis of the 1997-2005 input-output tables”, Bank of Japan Working Paper Series No. 09-E-2. United Nations (1999) Handbook of input-output table compilation and analysis, Handbook of National Accounting, Series F, No.74. New York. Wixted B, N Yamano and C Webb (2006) “Input-output analysis in an increasingly globalised world: Applications of OECD’s harmonised international tables”, OECD DSTI/ DOC(2006)7. 44 Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 X is the total output for each country (the sum of each row of ID and FD). Y is the output for each country that goes to final demand (the sum of each row of FD). This table is available in Excel format from the authors on request. ! Appendix 2 World input-output table (2006, USD billions) Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010 45 Appendix 3 Production and GDP inducement coefficient matrices. Table A3.1 Production inducement from one-unit increase in final demand. ! Each cell is the additional production in country i that is induced by a one-unit increase in domestic final demand in country j (where i represents the rows and j the columns). For example, a one unit-increase in domestic final demand in Canada (ca) induces an increase of 0.341 units of output in the US. Table A3.2 GDP inducement coefficient matrix ! Each cell is the percent of GDP in country i that is induced by a one-percent increase in domestic final demand in country j (where i represents the rows, and j the columns). For example, a one-percent increase in domestic final demand in Canada (ca) induces an increase of 0.016 percent of GDP in the US. 46 Reserve Bank of New Zealand: Bulletin, Vol. 73, No. 2, June 2010