The North East Economic Model Professor Ian Stone Andrew Hunt Durham Business School November 2006 A Collaborative Project with ONE/NERIP

(1)Multiplier Analysis in a Regional Context

Overview What is the effect of a change (or posited change) upon the region? Differences in regional fluctuations –timing and magnitudes Regional size –level of diversification –level of dependence on other regions Main modelling approaches –regional multipliers –input-output table –econometric modelling

Impact Analysis 1 New production activity Demand for other inputs Demand for Labour In-migrantsCommuters Previously unemployed Workers in other industries Demand for goods and services Locally produced goods and services Imports into region

Impact Analysis 2 PRIMARY EFFECT –Direct Effect: The income and employment arising at the new plant SECONDARY EFFECTS –Indirect Effect: The income and employment arising out of the plants demand for inputs –Induced Effect: The income and employment arising as increases in income are spent within the local economy

First Round Leakages Initial positive injection Increase in regional GDP/wages/ profits etc. Increase in disposable income Taxes, NI, retained earnings, loss of benefits etc Imports into region, taxes on additional expenditure Indirect and induced expenditure within region Savings of residents, earnings to residents from other regions

Application: Universities Local Economy Expenditure on staff Student expenditure Non-staff expenditure Feedback from staff expenditure Problem with multiplier studies – collection of data for each study …time-consuming and costly

Automotive Sector Gross Output at Basic Prices £million

(2) Input-Output Analysis

Input Output Analysis - Overview Input-Output techniques = one method of modelling a regional or national economy –input flows to each sector (purchases) –output flows from each sector (sales) –captures how each sector relates to all others incl. households, government + external trade.

Functions of an Input-Output Table Descriptive framework showing the absolute and relative sizes of sectors and relationships to other sectors at a given time Predictive tool, showing the response of the economy to internal and external shocks

Components of a completed table Transactions table/matrix –Shows monetary value of intra- and inter- regional trade emanating from each industry. –Outputs are recorded along the rows –Inputs are recorded in the columns Technical coefficients table/matrix –Derived form the transactions table –Shows money values of inputs required by sector x from each other sector, to produce one unit of output

Simple Transactions Table

Complex Transactions Table

Predicting with an I-O Table Most predictions involve scaling of all or part of the table, thus assuming –Leontief-type production functions no input substitution (right angle isoquants) –No changes in technology –Marginal spending patterns for the sectors are equal to the average spending patterns –Perfectly elastic supply of inputs (and hence output)- real prices are unresponsive to demand changes = implies no capacity constraints

Iterating the Table 1 Calculating technical coefficients –Manufg buys £40 of inputs from agriculture –Manufg’s total gross inputs equal £200 General formula - technical coefficient – –Where: i=row number, j=column number X=gross outlay

Iterating the Table 2 The technical coefficients tell us the size of the direct effects of any shock (immediate supply chain effects) We also need the indirect and induced effects… –e.g. Manufacturing expands (exogenous reason) It demands inputs from other sectors –Hence, other firms expand and demand inputs + consumer spending rises.

Iterating the Table 3 These further effects can be summed and added to the direct effect to give the total effect on all sectors of the initial shock This can be done efficiently on a computer using matrix algebra techniques, allowing production of sectoral multipliers Multipliers can be produced for output, income and employment

Employment Multipliers

Analysis of Inter-linkages

(3) The Durham Model North East Regional Input-Output Accounts

Components 111 Industries and product groups For each industry data is available on –Output and GVA –Capital expenditure –Business size –Worker headcounts –FTE workers FTE workers by industry can be disaggregated into –7 Qualification groupings –22 Occupation groupings

Components For each industry data is available on –Goods exports by 14 EU countries, 7 other overseas areas, and ‘other’ (UK regions) –Service exports, overseas and ‘other’ (UK regions) –Imports from overseas and ‘other’ (UK regions) Income and spending for 11 household groups (SOC classification plus unemployed and retired) Spending patterns of domestic and overseas tourists Spending patterns of local and national government

Schematic Diagram North East industrial sectors - production and sales Trade Government (local and central) Sub-regional breakdowns Households (regional population) Qualifications Rest of UK Rest of World (inc. breakdowns) Occupations Industrial clusters Capital investment

Applications Anatomy of the regional economy (static picture or ‘snapshot’) Measurement and analysis of structural change Identification and analysis of industrial clusters and supply chains Impact analysis Forecasting/scenario exploration

Ongoing Work Sub-regional analysis – available soon Briefing reports (R.E.S. Priority Sector action planning, key clusters, projections; in conjunction with NERIP, ONE and other regional partners) Environmental accounts –Environment agency (REWARD) Energy use Air pollution Water use Waste arising

Example: Food and Drink Gross output £1525m –Meat processing18% –Fish and fruit processing15% –Dairy products10% –Grain milling and starch2% –Animal feed1% –Baking and confectionery38% –Beverages16%

Example: Food and Drink Exports –EU 14£39m (60% to France, Ireland & Spain) –Non EU£12m (50% to Western Europe) –Other UK regions£864m –Reminder is sold within the region

Example: Food & Drink A 10% expansion of the sector Total £214 million Gross output = Gross Value Added (~Profits + labour costs) + Intermediate Purchases

Total £88 million Example: Food & Drink A 10% expansion of the sector

Total 3178 FTEs Example: Food & Drink A 10% expansion of the sector

Total 3178 FTEs Example: Food & Drink A 10% expansion of the sector

Example: Food & Drink Additional results could be generated for –Occupational groupings –Self-employment –Business size bands ( 50) –Imports –Interactions between data GVA per FTE Others?

References Theory Armstrong and Taylor (latest edition), Regional Economics & Policy Ch. 1 Regional income and employment determination Ch 2 The input-output approach to modelling the regional economy Multiplier application Lincoln, Stone & Walker (1995), ‘The Contribution of Newcastle’s Higher Education Sector to the Local Economy’ Northern Economic Review, 1995, issue 24