Input – Output Analysis MK Geografi Ekonomi Dept. Geografi FMIPA UI

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A simple model of trade Exports Internal Goods and Services Imports

The Economic Base Model ET = Total Employment EX = Export Employment EL = Local Employment ET = EX + EL (1) Define a = EL/ET Multiply by ET and substitute into (1): ET = EX + aET Solve for ET: ET = ( 1/1-a)EX

Example, Economic Base Model If a = .67 Then:( 1/1-.67) =( 1/.33) = 3 If EX = 500, then ET = 3 x 500 or 1500. If EX rises to 750, ET becomes 3 x 750 or 2250 and if EX falls back to 400, ET declines to 1200

Measurement of the Economic Base Multiplier Direct Surveys “Short-cut” Approaches: Assumption or Assignment Minimum Requirements Location Quotients Industry Specific Models: Input-output Regional econometric models

Example of Minimum Requirements (Thousands) If total employment was 100,000, then minimum requirements is 6%, or 6,000. If actual employment were 10,000, 4,000 would be assigned to exports. Repeat for all industries, sum local shares to obtain “a”

Example of Location Quotient Approach to Economic Base Industry Jobs LQ Export Local Agriculture 500 0.8 0 500 Mining 300 5.0 240 60 Manufacturing1000 2.0 500 500 Retail 1500 1.0 0 1500 Services 3000 1.2 500 2500 Total 6300 1240 5060 a = 5060/6300 = .803, so (1/1-.803) = 5.08

Size of Region and Size of Multiplier 1.0 .67 Wn.State Mult. = 3 World - Mult =  Individual Sells all labor a = 0, multiplier = 1.0 Log Population

Regional Input-Output Models Final Demand Total Sales = Total Purchases Total Sales = Intermediate Sales + Final Sales Total Purchases = Intermediate Purchases + Value Added + Imports

Washington State Input-Output Model Handouts: Transactions Table Direct Requirements Matrix Direct & Indirect Requirements Matrix Direct, Indirect, & Induced Requirements Matrix Input-Output Notation

Impact Analysis Using I/O Models Direct, Indirect & Induced Requirements Matrix = Final Demand X Output Employment Impacts calculated from Output Impacts

Impact Analysis with I/O Models Key Inputs: Final Demand values for output, income, and jobs Key modeling requirements: I/o model relevant to the problem Results: usually reported for jobs, income, output, and taxes

Direct & Indirect Output Multipliers

Direct & Indirect Labor Income Per Dollar of Final Demand

Direct & Indirect Jobs Per $ Million Final Demand

Output Multipliers

Labor Income Multipliers Per $ Final Demand

Employment Multipliers

Regional Models, continued Regional Econometric Models Interregional Input-output models Structural Change

Regional Econometric Models The Washington Projection & Simulation Model Coefficient Change Consumption National Econometric Model Exports Output (I/O Relations) Imports State & Local Government Income Employment and Population Investment Productivity Rates Wage rates, tax rates, nonearnings income

WPSM Simulation of Change in Aerospace Exports

Multiregional Models Region B Region A Region D Region C

Multiregional Input-Output Model (intermediate & final transactions including interregional value added payments) Feedback Loops

Simulation of Columbia Basin Irrigation Project Development Project Region Other Washington

Estimate of Employment Impacts from Multiregional Model

Gross Output Levels Required to Deliver 1961 Final Demand General Industries Materials Metalworking & Chemicals All Other 39.8% 37.6% 40.8% 18.5% 17.0% 14.7% 14.5% 16.0% 13.6% 28.8% 30.3% 28.5% Total Gross Output 686 677 689 1961 1939 1947

Employment Required to Deliver 1961 Final Demand with earlier Technologies 101 86 58 Millions of man-years Source: A. Carter, Structural Change in the American Economy

$ 1961 F.D. 662 617 523

U.S. Structural Change - Output, GNP, Intermediate Production Gross National Product 50.7% 51.2% 51.2% Intermediate Sales 48.8% 49.3% 48.8% Total Gross Output 688 270 435 1961 1939 1947

Input-Output Model Basics Disadur dari bahan kuliah: Tom Harris University of Nevada, Reno University Center for Economic Development MS 204 Reno, NV 89557-0105 and Gerald A. Doeksen Oklahoma State University Oklahoma Cooperative Extension Service 515 Ag Hall Stillwater, OK 74078

Examples of Interrelationships Between Sectors: Sectors purchase from other sectors Sectors sell to other sectors Sectors sell outside the local economy Sectors buy outside the local economy

Overview of Community Economic System Households Industry Basic Services Goods & $ Inputs Products Labor Overview of Community Economic System

Input-Output analysis creates a picture of a regional economy describing flows to and from industries and institutions

What Input-Output Analysis Can Do: Input-Output Analysis is an accounting framework Input-Output analysis can be used to predict changes in overall economic activity as a result of some change in the local economy

Uses of Input-Output Analysis Provides a description of a local economy Predictive model to estimate impacts

3 Basic Components of Input-Output Models Transactions Table Direct Requirements Table Total Requirements Table

Transactions Table A transactions table shows the monetary flows of goods and services in a local economy Represents monetary flows for a given time period, usually one year

Transactions Table Flows Total outlays = Total output Intermediate purchases are goods and services purchased and used in the local production process Final demands are purchases for final consumption Final payments are payments for factors or inputs outside intermediate production process

Example Transactions Table Selling Sectors ($ million) Purchasing Sectors ($ million) Agriculture Health Services Final Total Demands Output Agriculture 10 6 2 18 36 Health 4 4 3 26 37 Services 6 2 1 35 44 Final 16 25 38 0 79 Payments Total Input 36 37 44 79 196

Predictive Use of Input-Output Analysis Impacts are tracked throughout the economy The multipliers are derived from regional economic accounts Only local transactions are used to create the multiplier effect

Direct Requirements Table Direct requirements are the purchases of resources (inputs) by a sector from all sectors to produce one dollar of output Creates a production recipe

Direct Requirements Table Purchasing Sectors Agriculture Health Services Agriculture 0.278 0.162 0.045 Health 0.111 0.108 0.068 Services 0.167 0.054 0.023 Final Payments 0.444 0.676 0.864 Total 1.000 1.000 1.000 Selling Sectors

Multipliers measure total change throughout the economy What are Multipliers? Multipliers measure total change throughout the economy from one unit change for a given sector.

Three Types of Multipliers are calculated from Model 1. Output 2. Employment 3. Income

Three levels of Multipliers Type I Multipliers Type II Multipliers Type III Multipliers

Type I Multipliers Include direct or initial spending Include indirect spending or businesses buying and selling to each other The multiplier is direct plus indirect effect divided by direct effect

Type II Multipliers Includes Type I Multiplier effects Plus household spending based on the income earned from the direct and indirect effects – the induced effects

TYPE III MULTIPLIERS Type III Multipliers are modified Type II multipliers. Therefore, Type III Multipliers also include the direct, indirect, and induced effects. Type III Multipliers adjust Type II Multipliers based on spending patterns amongst different income groups.

Type I Multipliers include:  Direct  Indirect (Business Spending) Type I Multipliers are derived from the Total Requirements Table In math, this is: X = (1-A)-1 Y

Total Requirements Table Purchasing Sectors ($ million) Agriculture Health Services Agriculture 1.446 0.268 0.085 Health 0.199 1.163 0.090 Services 0.258 0.110 1.043 Total 1.903 1.541 1.218 Selling Sectors ($ million)

Explaining the Health Sector Type I Multiplier For a $1.00 change in final demand sales in the local economy, the total direct and indirect impacts are $1.541

Type II Multipliers include:  Direct  Indirect (Businesses)  Induced (Households) Type II Multipliers are derived from the Total Requirements Table with Households

Transactions Table with Households Selling Sectors ($ million) Purchasing Sectors ($ million) Ag Health Services House- Final Total holds Demands Output Ag 10 6 2 2 16 36 Health 4 4 3 10 16 37 Services 6 2 1 7 28 44 Households 3 6 10 0 0 19 Final 13 19 28 0 0 60 Payments Total Input 36 37 44 19 60 196

Total Requirements Table with Households Purchasing Sectors Agriculture Health Services Households Agriculture 1.536 0.369 0.197 0.429 Health 0.386 1.370 0.318 0.879 Services 0.388 0.256 1.203 0.619 Households 0.279 0.311 0.341 1.319 Total 2.589 2.307 2.059 3.245 Selling Sectors

Explaining the Health Sector Type II Multiplier For a $1.00 change in final demand sales in the local economy, the total direct, indirect and induced impacts are $2.307

Multipliers Direct requirements represent direct or initial spending Direct and indirect effects include the direct spending plus the indirect spending or businesses buying and selling to each other Direct, indirect and induced effects include direct and indirect plus household spending earned from direct and indirect effects

Other Multipliers Employment Multipliers Type I Type II Type III Income Multipliers

Example - Type I Employment Multiplier Agricultural Sector Type I Employment Multiplier = 1.43 When the Agricultural Sector realizes a 1 employee change, total employment in the study area changes by 1.43 jobs from direct and indirect linkages

Example – Type II Employment Multiplier Agricultural Sector Type II Employment Multiplier = 2.25 When the Agricultural Sector realizes a 1 employee change, total employment in the study area changes by 2.25 jobs from direct, indirect and induced linkages

Breakdown of Type II Employment Multiplier - Agricultural Sector Direct Effects = 1.00 Indirect Effects = 0.43 Induced Effects = 0.82 Total = 2.25

Example – Type I Income Multiplier Agricultural Sector Type I Income Multiplier = 1.96 When the Agricultural Sector realizes a $1.00 change in income, total income in the study area changes by $1.96 from direct and indirect linkages

Example - Type II Income Multiplier Agricultural Sector Type II Income Multiplier = 2.50 When the Agricultural Sector realizes a $1.00 change in income, total income in the study area changes by $2.50 from direct, indirect and induced linkages

Breakdown of Type II Income Multiplier - Agricultural Sector Direct Effects = $1.00 Indirect Effects = $0.96 Induced Effects = $0.54 Total = $2.50

Caution When Using Multipliers Multiplier values include direct effects Do not aggregate sector multipliers to derive an aggregate multiplier Be cautious of large multipliers Be cautious in using a multiplier from another study area

Procedures Used For This Analysis IMPLAN (IMPact analysis for PLANning) * Geographical database * Software and data for model construction and impact analysis * History of IMPLAN

IMPLAN USE FOR HEALTH SECTOR ANALYSIS Develop county-wide input-output model From State Employment Security Offices derived health sector employment Use IMPLAN to derive county-wide output, employment, income and sales tax impacts from the local health sector

Database of IMPLAN 528 Industrial Sectors Most 3 or 4 digit SIC All standard counties in the U.S. Now available at zip code level

Any Questions?

Econ Base vs Input-Output Models Leontief developed an “input-output” method for estimating economic impacts and tracing the flows of dollars. Leontief later won the Nobel Prize in 1973, largely related to this work. Input-Output expands heavily upon the economic base model of the economy. Economic Base Techniques Basic and Non-basic sectors Ripple (multiplier) effects analyzed at the B/NB level Analyzes changes and impacts at a gross B/NB level Very general, but… Input-Output Analysis Many different industries/sectors Ripple (multiplier) effects contained in the interindustry transactions Analyzes changes and impacts at a sector by sector level, tracing flows of dollars between industries Much more precise, but…

The Economic Base Theoretical Model The EB model assumes that the basic sector is the primary cause of local economic growth; that is, it is the economic base of the local economy. Non-Local $$$’s Local $$$’s Basic Sector Employment Non-Basic Sector Employment The Local Economy

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. Outputs from one industry become inputs to another. When you buy a car, you affect the demand for glass, plastic, steel, etc. Taken from a Power Point presentation prepared by Pam Perlich at the University of Utah. http://www.business.utah.edu/~bebrpsp/IO/IO.ppt

Basic Input-Output Logic Steel Glass Tires Plastic Other Components Automobile Factory

From the Tire Producer’s Perspective Individual Consumers FINAL DEMAND FOR TIRES School Districts Tire Factory Trucking Companies INTER- MEDIATE DEMAND FOR TIRES Automobile Factory

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.

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.

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

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”.

The Transaction Table and Direct Reqs Tables

The First Round of Economic Impacts To Rd. 2

The Second-Fourth Rounds of Econ. Impacts and so on until the mult. effect ends

The Total Requirements Results When: 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.

The Total Requirements Table

RIMS Multipliers The Bureau of Economic Analysis (BEA) produces State Level Regional Input-Output Multipliers by industrial sector which are often used as the basis for constructing an IO model. Originally developed in the 1970s, RIMS (Regional Industrial Multiplier System) multipliers are used for “impact analysis” for a given economy. RIMS II data were developed in the 1980’s (latest version is 1998) Users can purchase data from BEA for $275 per region. BEA provides handbooks for the use of this data. County or multi-county regional RIMS data come in two series Series I: for 490 detailed industries Series II: for 38 industry aggregations Empirical analysis shows that RIMS II data is accurate within 5% of locally developed industry multipliers. Advantages of the RIMS Multipliers: 1) Cheap 2) Can be compared across regions 3) Detailed industries 4) Updated regularly to reflect new data

Example RIMS Multipliers 1Total dollar impact due to $1 in output in the industry. 2Change in earnings due to $1 change in industry. 3Change in employment resulting from $1 million increase in output delivered to final demand.

For More Info on RIMS Multipliers The Bureau of Economic Analysis (BEA) has several web resources on RIMS Multipliers and how they are prepared: RIMSII Home Page http://www.bea.doc.gov/bea/regional/rims/ Brief Description of RIMS II http://www.bea.doc.gov/bea/regional/rims/brfdesc.cfm RIMSII User’s Handbook http://www.bea.doc.gov/bea/ARTICLES/REGIONAL/PERSINC/Meth/rims2.pdf

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.

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.