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

2. Next …………

3. A simple model of trade
Exports
Internal Goods
and Services
Imports

4. 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

5. 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

6. 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

7. 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”

8. Example of Location Quotient Approach to Economic Base
Industry Jobs LQ Export Local
Agriculture
Mining
Manufacturing
Retail
Services
Total
a = 5060/6300 = .803, so (1/1-.803) = 5.08

9. 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

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

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

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

13. 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

14. Direct & Indirect Output Multipliers

15. Direct & Indirect Labor Income Per Dollar of Final Demand

16. Direct & Indirect Jobs Per $ Million Final Demand

17. Output Multipliers

18. Labor Income Multipliers
Per $ Final Demand

19. Employment Multipliers

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

21. 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

22. WPSM Simulation of Change in Aerospace Exports

23. Multiregional Models
Region B
Region A
Region D
Region C

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

25. Simulation of Columbia Basin Irrigation Project Development
Project Region
Other Washington

26. Estimate of Employment Impacts from Multiregional Model

27. 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

28. 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

29. $ 1961 F.D.
662
617
523

30. 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

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

32. 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

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

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

35. 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

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

37. 3 Basic Components of Input-Output Models
Transactions Table
Direct Requirements Table
Total Requirements Table

38. 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

39. 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

40. Example Transactions Table
Selling Sectors
($ million)
Purchasing Sectors ($ million)
Agriculture Health Services Final Total
Demands Output
Agriculture
Health
Services
Final
Payments
Total Input

41. 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

42. 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

43. Direct Requirements Table
Purchasing Sectors
Agriculture Health Services
Agriculture
Health
Services
Final Payments
Total
Selling Sectors

44. 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.

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

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

47. 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

48. 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

49. 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.

50. 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

51. Total Requirements Table
Purchasing Sectors ($ million)
Agriculture Health Services
Agriculture
Health
Services
Total
Selling Sectors
($ million)

52. 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

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

54. Transactions Table with Households
Selling Sectors
($ million)
Purchasing Sectors ($ million)
Ag Health Services House- Final Total
holds Demands Output Ag
Health
Services
Households
Final
Payments
Total Input

55. Total Requirements Table with Households
Purchasing Sectors
Agriculture Health Services Households
Agriculture
Health
Services
Households
Total
Selling Sectors

56. 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

57. 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

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

59. 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

60. 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

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

62. 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

63. 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

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

65. 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

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

67. 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

68. 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

69. Any Questions?

70. 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…

71. 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

72. 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.

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

74. 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

75. 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.

76. 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.

77. 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.

78. 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 )
Let’s review Bendavid-Val’s “Islandia example”.

79. The Transaction Table and Direct Reqs Tables

80. The First Round of Economic ImpactsTo
Rd. 2

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

82. 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) in Initial Sales to Final Purchasers
2) in Total Direct Sales
3) in Total Indirect Sales
The 300 units in Final Sales generate an additional units of economic activity. This illustrates the multiplier effect captured by IO models.

83. The Total Requirements Table

84. 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

85. 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.

86. 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
Brief Description of RIMS II
RIMSII User’s Handbook

87. 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.

88. 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.