Input-Output Model Sittidaj Pongkijvorasin Faculty of Economics, Chulalongkorn University

What is I-O Model? The Input-output model of economics uses a matrix representation of a nation's (or a region's) economy to predict the effect of changes in one industry on others and by consumers, government, and foreign suppliers on the economy. (Wikipedia) matrix First developed by Leontief, who later won Nobel Prize for this.

Concept  Industries are interdependent  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.  When you buy a car, you affect the demand for glass, plastic, steel, etc.

Automobile Factory Steel Glass Tires Plastic Other Components garnet.acns.fsu.edu/~tchapin/urp5261/lectures/Input-Output%20Overview.ppt

From the Tire Producer’s Perspective Tire Factory School Districts Trucking Companies Automobile Factory Individual Consumers INTER- MEDIATE DEMAND FOR TIRES FINAL DEMAND FOR TIRES garnet.acns.fsu.edu/~tchapin/urp5261/lectures/Input-Output%20Overview.ppt

Simplified Circular Flow View of The Economy Households buy the output of business: final demand or Y i Businesses Households Goods & Services $$ Consumption Spending (Yi) Labor $$ Wages & Salaries Businesses Businesses purchase from other businesses to produce their own goods / services. This is intermediate demand or x ij (output of industry i sold to industry j) Households sell labor & other inputs to business as inputs to production Taken from a Power Point presentation prepared by Pam Perlich at the University of Utah.

Interindustry Demand Z Final Demand Y Outputs Inputs Total Output, X Input-Output Table

Computation

Selling Sectors ($ million) Purchasing Sectors ($ million) AgricultureHealthServicesFinal Total Demands Output Agriculture Health Services Final Payments Total Input Concept

Advantage Sector-level analysis (170 sectors for Thailand, 4xx sectors for the U.S.) General equilibrium Easy to construct (if I-O table exists), suitable for the real-world policy analysis

How can we use I-O Model? Example: The effect of fuel tax on Thai economy. GDP Fuel tax Weight Final demand OutputEmissions Income (GDP) Demand system I-O Model EIO Model

Data availability Constant technical coefficients: “snapshot” Linear relationships between inputs and outputs (no externality, constant return to scale) Each industry has homogenous, and only one, production function The problems of I-O Model