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Input-Output Model

The document discusses the input-output model, which analyzes the interconnections between different industries and how they purchase each other's products. It explains the basic logic and concepts of input-output analysis, including transactions tables, direct requirements tables, and total requirements tables. It also discusses the multiplier effect captured by input-output models and some limitations of the approach.

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geofrey ascutia
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46 views

Input-Output Model

The document discusses the input-output model, which analyzes the interconnections between different industries and how they purchase each other's products. It explains the basic logic and concepts of input-output analysis, including transactions tables, direct requirements tables, and total requirements tables. It also discusses the multiplier effect captured by input-output models and some limitations of the approach.

Uploaded by

geofrey ascutia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INPUT-OUTPUT

MODEL
PLANNING FOR ARCHITECTS: A CAPABILITY BUILDING
SEMINAR FOR ARCHITECTS
UNITED ARCHITECTS OF THE PHILIPPINES
Professional Development Commission
2nd Floor, UAP Headquarters
53 Scout Rallos St. Quezon City, Metro Manila
EnP Mike V. Guioguio
Resource Speaker

5/1/08 Guioguio, Mike V. Input-Output 1


Input-Output Model
• The IO model is centered on the idea of inter-industry
transactions:
– Industries use the products of other industries to
produce their own products.
– For example - automobile producers use steel, glass,
rubber, and plastic products to produce automobiles
(backward linkages).
– Outputs from one industry become inputs to another
(forward linkages).
– When you buy a car, you affect the demand for glass,
plastic, steel, etc.

5/1/08 Guioguio, Mike V. Input-Output 2


Basic Input-Output Logic
Tires
Glass Plastic Other
Steel
Components

Automobile Factory

5/1/08 Guioguio, Mike V. Input-Output 3


From the Tire Individual
Producer’s Consumers

Perspective FINAL
School
Districts DEMAND
FOR TIRES
Tire Factory Trucking
Companies

INTER-
Automobile
MEDIATE
Factory DEMAND
FOR
TIRES
5/1/08 Guioguio, Mike V. Input-Output 4
Input-Output Analysis: The BIG Point
• The implicit assumption in economic base techniques is that each basic
sector job has a multiplier (or ripple) effect on the wider economy because
of purchases of non-basic goods and services to support the basic
production activity. (the Basic Sector drives the Non-basic Sector)
• However, we know that Non-basic sector businesses purchase Non-basic
goods and services and Basic sector businesses purchase Basic sector goods
and services. There are inter-industry linkages not contained within the
Economic Base model. The economy is much more complex than the
economic base techniques allow or attempt to model.
• The central advantage of Input-Output analysis is that it tries to estimate
these inter-industry transactions and use those figures to estimate the
economic impacts of any changes to the economy.
• Instead of assuming a change in a basic sector industry having a generalized
multiplier effect, the IO approach estimates how many goods and services
from other sectors are needed (inputs) to produce each dollar of output for
the sector in question. Therefore it is possible to do a much more precise
calculation of the economic impacts of a given change to the economy.
5/1/08 Guioguio, Mike V. Input-Output 5
IO Conceptualization of the Economy
• The major conceptual step is to divide the economy into “purchasers”
and “suppliers”.
--Primary Suppliers: They sell primary inputs (labor, raw materials) to
other industries. Payments to these suppliers are “primary inputs”
because they generate no further sales. (example: Households)
--Intermediate Suppliers: They purchase inputs for processing into outputs
they supply to other firms or to final purchasers. (example: Automaker)
--Intermediate Purchasers: They purchase outputs of suppliers for use as
inputs for further processing. (example: Automaker)
--Final Purchasers: Purchase the outputs of suppliers in their final form
and for final use. (example: Households)
• Intermediate Suppliers and Intermediate Purchasers are the same thing!
• Primary Suppliers and Final Purchasers may or may not be the same
entities. When they are the same (households), these activities are
understood as separate activities.
5/1/08 Guioguio, Mike V. Input-Output 6
Simplified Circular Flow View of The Economy
$$ Consumption Spending (Yi)

Goods & Services

Households Businesses Businesses


Labor

$$ Wages & Salaries Businesses purchase from


other businesses to produce
Households buy Households sell
their own goods / services.
the output of labor & other
business: final inputs to business This is intermediate
demand or Yi as inputs to demand or xij (output of
production industry i sold to industry j)
Taken from a Power Point presentation
prepared by Pam Perlich at the University of Utah.
http://www.business.utah.edu/~bebrpsp/IO/IO.ppt

5/1/08 Guioguio, Mike V. Input-Output 7


5/1/08 Guioguio, Mike V. Input-Output 8
The Structure of IO Analysis
• The ultimate goal of the Input-Output Analysis technique is to generate a
Total Requirements Table that shows the flows of dollars between
industries in the production of output for a given sector.
• To arrive at this final result, IO Analysis requires two earlier steps:
1) Transactions table: Contains basic data on the flows of goods and
services among suppliers and purchasers during a study year.
2) Direct requirements table: Derived from the transactions table, this
shows the inputs required directly from different suppliers by each
intermediate purchaser for each unit of output that purchaser produces.
• “Input output analysis can be thought of as documenting and exploring the
precise systems of interindustry exchange through which different
components of regional product become different components of regional
income.” (Bendavid-Val, p. 87-88)
• Let’s review Bendavid-Val’s “Islandia example”.

5/1/08 Guioguio, Mike V. Input-Output 9


The Transaction Table and Direct Reqs Tables

5/1/08 Guioguio, Mike V. Input-Output 10


The First Round of Economic Impacts

To
Rd. 2

5/1/08 Guioguio, Mike V. Input-Output 11


The Second-Fourth Rounds of Econ. Impacts

and so on
until the mult.
effect ends
5/1/08 Guioguio, Mike V. Input-Output 12
The Total Requirements Results

When:
1) there are “Final Sales” of Agriculture = 200 and “Final Sales” of
Manufacturing = 100
2) we see a Total Economic Impact = 763.1, with that impact broken
down as:
1) 300.0 in Initial Sales to Final Purchasers
2) 300.0 in Total Direct Sales
3) 163.1 in Total Indirect Sales
The 300 units in Final Sales generate an additional 463.1 units of
economic activity. This illustrates the multiplier effect captured by
IO models.
5/1/08 Guioguio, Mike V. Input-Output 13
The Total Requirements Table

5/1/08 Guioguio, Mike V. Input-Output 14


The Problems with IO Analysis
Practical Issues
• Data needs and complexity: IO models are tremendously complex and very
data hungry. This typically places these models in the hands of experts.
Theoretical Issues
• Time/Data issues: Usually a single year’s data are used to develop the Total
Requirements Table. But 1) purchases may actually reflect a longer term
investment and 2) short term trends may impact the data.
• Stability of the technical coefficients over time: Technology changes, prices
change, and demand changes, all affecting the coefficients in the Tot Reqs
Table. This can impact the results if the coefficients are “out of date”.
• IO assumes a linear relationship between increasing demand for inputs
and outputs: This assumes away 1) externalities and 2) increasing/
decreasing returns to scale.
• Industrial categorization: IO models still assume that each industry 1) has
a single, homogeneous production function and 2) each produces one
product. These assumptions do not reflect the real economy very well.

5/1/08 Guioguio, Mike V. Input-Output 15


The Power of IO Models
• Despite these problems IO analysis is a tremendously popular and
powerful analytical tool.
• “The chief value of regional input-output analysis is in its descriptive
analytical power.” (Bendavid-Val, p.113)
• “As a descriptive tool, input-output tables:
-present an enormous quantity of information in a concise, orderly,
and easily understood fashion;
-provide a comprehensive picture of the interindustry structure of
the regional economy;
-point up the strategic importance of various industries and sectors;
-highlight possible opportunities for strengthening regional income
and employment multiplication.” (Bendavid-Val, p.113)
• Urban Planners should be capable of understanding the structure,
assumptions, and data requirements of Input-Output Analysis. While
you may not be performing this analysis in your jobs, you almost
certainly will come across this type of work sometime in your career.
5/1/08 Guioguio, Mike V. Input-Output 16
PHILIPPINES INPUT-OUTPUT

5/1/08 Guioguio, Mike V. Input-Output 17


5/1/08 Guioguio, Mike V. Input-Output 18
5/1/08 Guioguio, Mike V. Input-Output 19
END OF
PRESENTATION!!

5/1/08 Guioguio, Mike V. Input-Output 20

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