An Introduction to

IMPACT ANALYSIS USING

INPUT-OUTPUT TABLES

IFPRI On-Line
2018
 What have we learned so far?
I: Usefulness of Economy-Wide & IO Tables

• Why IO based modeling may be important

• Concerned with econ-wide, consistency & structure

II: Composition & construction of an IO Table

III: Linear Algebra (homework)

• Basics
Next: IO Multiplier Models

I: Lecture on IO Multipliers
•What are we trying to achieve? What is the basic question?
•Underlying theory & algebra
•Interpretation of the results

II: Exercises with a IO model

•Class exercise
•Own exercise
•How to do the basics
•Generate initial results & interpretation
 Preliminary Steps to Multiplier Modelling
Step I: Need to formulate the question
- How does an exogenous change in Final Demand for goods & services
- Exogenous not “fixed” rather: changed manually, not explained by the model
- Impacts Production of All sectors?
- Production is “endogenous”, i.e., changed by the model
- (and later: supply of commodities and institutions, i.e., economy-wide)
- Many variations possible, this is the basic theme

Step II: Develop an appropriate model

- Model built on IO (later SUT and SAM)
- But…IO is systems of accounts, not model
- Need to specify relationships: linear, so very simple

Step III: Analyse the impact

Step IV: Explain the results
 Developing the Model
Principals of conventional multiplier modelling:
 Final Demand: assumed to change exogenous, e.g.
 Exports (10 Rand increase in manufacturing exports)
 Government expenditure (10 Rand increase)

 Supply: changes endogenously to match new FD

 Initially: we look at production (gross value) only
 Basic assumption: no shortage / no constraints!!!
 Question: implication for prices?
 Prices are fixed
 Developing the Multiplier Model

We take a gradual approach

 Start: IO Table
 Exercise based on IO Table
 Tomorrow: multipliers based on Supply-Use Table
 Exercise base on SUT Table
 Later in the Week: multipliers based on SAM
 Exercise is based on SAM
 Starting Point: A Simple Input-Output Table

Intermediate Demand Final Gross

Manuf Agric Demand Output
Manufacturing 150 500 250 900
Agriculture 200 100 700 1000
Value Added 550 400 950
Total Cost 900 1000 950

 Assume homogeneous industries:

 so, industry x industry
 Can add up in different ways to show relationships
Algebra: Use symbols instead of
numbers
Intermediate Demand Final Gross
Demand Output
Manuf Agric
Manufacturing Z11 Z12 F1 X1
Agriculture Z21 Z22 F2 X2
Value Added V1 V2
Total Cost C1 C2

 Not clear what units entries are measured in

 Depends on interpretation
Algebra I : Material Balances
Intermediate Demand Final Gross
Demand Output
Manuf Agric
Manufacturing Z11 Z12 F1 X1
Agriculture Z21 Z22 F2 X2
Value Added V1 V2
Total Cost C1 C2

 If entries are in quantities, can add along rows:

Manuf: X1 = Z11 + Z12 + F1
Agric: X2 = Z21 + Z22 + F2
 “Material Balances”
Algebra II : Costs
Intermediate Demand Final Gross
Demand Output
Manuf Agric
Manufacturing Z11 Z12 F1 X1
Agriculture Z21 Z22 F2 X2
Value Added V1 V2
Total Cost C1 C2

 If entries are in values, can add down columns:

Manuf: C1 = Z11 + Z21 + V1
Agric: C2 = Z12 + Z22 + V2
 “Costs”
 Algebra III : Production Functions
Intermediate Demand Final Gross
Demand Output
Manuf Agric
Manuf Z11 Z12 F1 X1
Agric Z21 Z22 F2 X2
Value Added V1 V2
Total Cost C1 C2
 If entries are in quantities but still want to go down the column then:
Manuf: X1 = f(Z11, Z21, V1)
Agric: X2 = g(Z12, Z22, V2)
 “Production functions”
 Developing the Standard IO Model
 Assume
 Final Demand is given exogenously
 Remember initial question??
 Supply is endogenous and perfectly elastic
 No production constraints
 … but also implies prices are fixed

 Often referred to as a : “demand driven model”

 How does supply respond to rise in exogenous demand?
 Need some idea of how outputs are produced
 Developing the Standard IO Model

 Outputs depend on inputs

 Consider production functions:
Manuf: X1 = f(Z11, Z21, V1)
 What information is in the IO table?
 about relationship between inputs and outputs
 Need to think in physical terms
 Information about production in the
Input-Output Table
Intermediate Demand Final Gross
Manuf Agric Demand Output
Manufacturing 150 500 250 900
Agriculture 200 100 700 1000
Value Added 550 400 950
Total Cost 900 1000 950

 900 units (sq mtr of cloth) of manufacturing output requires:

 150 units of input of manufacturing (“indigo dye’)
 200 units of input of agriculture (“tonnes of cotton”)
 550 units of value added inputs (“person hours”)
Exploring IO Production Functions
for Agriculture
Agric
Slope =
Z22/Z12
Could have
added Value
Added but
would
150 require 3D X2 = 1500

100 X2 = 1000
X2 = 1000 X2 = 1000

X2 = 500

Manuf
500 750
Modelling Production (cont)

 Restrictive implications
 Constant returns to scale
 Want to double output?
 Have to double each input!
 No economies of scale
 Convenience
 Linearity assumed
 Can specify all production in terms of unit values
 Information about production in the
Input-Output Table
 Useful, but need to know what happens when output changes
 Simplest assumption: ratios of inputs to outputs are fixed
 Also requires no extra information

How can we do this???

Derive ratios:
quantity of each input required to produce 1 unit of output?

Intermediate Demand Final Gross

IO TABLE
Manuf Agric Demand Output
Manufacturing 150 500 250 900
Agriculture 200 100 700 1000
Value Added 550 400 950
Total Cost 900 1000 950

COEFFICIENT MATRIX 150/900 ==0.22

200/900
500/1000 0.17
0.5

Manufacturing 0.17 0.50

Agriculture 0.22 0.10
Value Added 0.61 0.40
Total Cost 1.00 1.00
Coefficients
 These ratios are called
 Unit input requirements
 Unit coefficients
 Technical coefficients
 Input-output coefficients
 Or, just “coefficients”
 Show:
 The direct input of activity i (in row) required
 Per unit of output of activity j (in column)
 Coefficients, quantities and prices
 In principle technical coefficients show ratio of quantities
 But IO data (and SUT & SAM) collected in money (value) terms
Zij / Xj = Pi Qij / Pi Qi
…and we want
aij = Qij / Qj

 How can we do this?

 Since we assume prices are fixed, we can set all prices = 1
 This is impossible!!??
 1 smartphone = R5000
 1 loaf of bread = R20
 We can specify the units in which each product is measured
 Measure 1 unit of bread as if it is 250 loafs:
 Price bread & price of smartphone = 1
Remember the Original Question
 What is the impact of a R10 rise in demand for manufactures?
 Once we have the technical coefficients we can start answering
 First answer
COEFFICIENT MATRIX
Manuf Agric
Manufacturing 0.17 0.50
Agriculture 0.22 0.10
Value Added 0.61 0.40
Total Cost 1.00 1.00

 Since 1 unit of Manuf output requires 17 cents of Manuf inputs

 R10 will require R1.70
 Will also require require R2.20 of Agric inputs
 and R6.10 of Value Added inputs

BUT, IS THAT THE END OF THE STORY?

 The knock-on effects of a R10 rise in demand for goods
Remember
produced by manufacturing
this number!!
Additional Mnf Mnf Comm
R11.70
R13.90
R13.14
R13.09
R11.99
R14.09
R14.08
R14.02
R10.00
R13.63
R13.52
R13.33 Mnf
Comm Required: 0.29 x 0.17 = 0.05
Comm Agric Inputs
R10 x 0.17 = R1.70 R1.70 x 0.17 = 0.29
Mnf
Comm Mnf Comm
R10 Agr 0.37 x 0.50 = 0.19
Demand for Comm Agr Comm
goods produced R1.70 x 0.22 = 0.37
by Mnf Mnf Comm
R10 x 0.22 = R2.20 Mnf 1.10 x 0.17 = 0.19
Comm Agr Comm
Agr
2.20 x 0.50 = 1.10
Comms

Mnf Comms 0.17 0.50 Mnf Comm

Agr
0.22 x 0.50 = 0.11
Agr Comms 0.22 0.10 Comm Agr Comm
VA 0.61 0.40 2.20 x 0.10 = 0.22
Total Cost 1.00 1.00
Knock-On Effects (cont)

 To be repeated for Agriculture

 But it is tedious with many sectors
 Need a more efficient way
 Therefore, do a bit of linear algebra
THE FULL SYSTEM
Intermediate Demand Final
Gross Output
Demand
Mnf Agr
Mnf ZX
a11
15011 1 Z
a500
X2
1212 F1
250 X1
900
Agr a21
ZX
200
21 1 a100
Z X2
2222 F2
700 X2
1000
Value Added V1
550 V2
400

The
In material
Linear
Remember thebalance
per unitcan
Algebra: now
input be written coefficients?
requirement as
𝑎𝑎11 𝑎12𝑎12𝑍𝑋𝑖𝑗2𝑋+
11𝑋1 + 1 𝐹1 =𝑋𝐹1 𝑋1
Since
𝑎 𝑎𝑎𝑖𝑗 = ● <=> = 𝑖𝑗 𝑋𝑖 or and,
+ 𝑍𝑖𝑗 =𝑎 ….. we
𝐀●𝐱can+rewrite
𝐟=𝐱
𝑎2121𝑋1 +22 𝑋
𝑎22 𝑋𝑖2 +
𝑋 𝐹
2 𝐹2 =𝑋22 𝑋2
 “SOLVING” THE SYSTEM
𝐀●𝐱 + 𝐟 = 𝐱 I = the Identity
Matrix
𝐟 = 𝐱 − 𝐀●𝐱
𝐟 = 𝐈 − 𝐀 ●𝐱

𝐱= 𝐈−𝐀 −1 ●𝐟

1 0 0
Thus: can work out required gross outputs if we know: 0 1 0
•final demand vector 0 0 1
•technical coefficients matrix,
“Leontief Inverse” – or just
Because linear, also works for “small” changes in f “Leontief Matrix”

−1 ●∆𝐟
∆𝐱 = 𝐈 − 𝐀

Change in Output
Change in Final Demand
 Class Exercise
 Open Excel Workbook “Class Exercises”
 Sheet “IO Exercise”
 Work out the impact of a 15 unit rise in the demand for NAG
 Remember to use array functions:
 =mmult
 =minverse
 Activate by holding down “shift” and pressing “enter”
Interpreting the Leontief Inverse
 Coefficient matrix shows:
 The direct impact on gross commodity output
 …arising from a R1 change in final demand
 But we want to estimate
 Direct effects
 Indirect effects
 This is what the Leontief Inverse matrix represents
 Question:
 How does Leontief Inverse pick up indirect effects
 …shown in the expansion tree presented earlier?
 Interpreting the Leontief Inverse

Lets take a round by round approach

Consider the following change in Final Demand:
What are the extra outputs
1 needed to meet a 1 unit rise in
round 1 ∆𝐟 = demand for Mnf Activities?
0
0.17 0.50 1 0.17
round 2 𝐀●∆𝐟 = ● =
0.22 0.10 0 0.22

Indirect Effect: Extra outputs

needed to produce the extra
output in round 1
 Remember the knock-on effects of a R10 rise in
demand for goods produced by manufacturing
Mnf Comm
Mnf
0.29 x 0.17 = 0.05
Comm Agric Inputs
R10 x 0.17 = R1.70 R1.70 x 0.17 = 0.29
Mnf
Comm Mnf Comm
R10 Agr 0.37 x 0.50 = 0.19
Demand for Comm Agr Comm
goods produced R1.70 x 0.22 = 0.37
by Mnf Mnf Comm
R10 x 0.22 = R2.20 Mnf 1.10 x 0.17 = 0.19
Comm Agr Comm
Agr
2.20 x 0.50 = 1.10
Comms
Mnf Comm
Agr
0.22 x 0.50 = 0.11
Comm Agr Comm
2.20 x 0.10 = 0.22
 Interpreting the Leontief Inverse

Consider the following change in Final Demand:

1
round 1 ∆𝐟 =
0
0.17 0.50 1 0.17
round 2 𝐀●∆𝐟 = ● =
0.22 0.10 0 0.22
0.17 0.50 0.17 0.14
round 3 𝐀● 𝐀●∆𝐟 = ● =
0.22 0.10 0.22 0.06

Indirect effect: Extra

outputs needed to produce
the extra output in round2
 Remember the knock-on effects of a R10 rise in
demand for goods produced by manufacturing
Mnf Comm
Mnf
0.29 x 0.17 = 0.05
Comm Agric Inputs
R10 x 0.17 = R1.70 R1.70 x 0.17 = 0.29
Mnf
Comm Mnf Comm
R10 Agr 0.37 x 0.50 = 0.19
Demand for Comm Agr Comm
goods produced R1.70 x 0.22 = 0.37
by Mnf Mnf Comm
R10 x 0.22 = R2.20 Mnf 1.10 x 0.17 = 0.19
Comm Agr Comm
Agr
2.20 x 0.50 = 1.10
Comms
Mnf Comm
Agr
0.22 x 0.50 = 0.11
Comm Agr Comm
2.20 x 0.10 = 0.22
 Interpreting the Leontief Inverse

Consider the following change in Final Demand:

1
round1 ∆𝐟 =
0
Etc, etc, …..
0.17 0.50 1 0.17
round2 𝐀●∆𝐟 = ● =
0.22 0.10 0 0.22
0.17 0.50 0.17 0.14
round3 𝐀● 𝐀●∆𝐟 = ● =
0.22 0.10 0.22 0.06
Total increase in demand to meet the direct and indirect requirements is:

All rounds ∆𝒇 + 𝑨●∆𝒇+𝑨2 ●∆𝒇+𝑨3 ●∆𝒇+ ⋯ +𝑨𝑛 ●∆𝒇=

𝐈−𝐀 −1 ●∆𝐟
Geometric series
 Interpreting the Leontief Inverse
Based on the values for A, the Leontief Inverse takes on the following:
−1 1.41 0.78
𝐈−𝐀 =
0.35 1.30
A 1 unit increase in demand for goods produced by Mnf only leads to:
−1 ●∆𝐟 1.41 0.78 𝟏 1.41
𝐈−𝐀 1 = ● =
0.35 1.30 0 0.35

A 1 unit increase in demand for goods produced by Agr only leads to:

−1 ●∆𝐟 1.41 0.78 0 0.78

𝐈−𝐀 2 = ● =
0.35 1.30 𝟏 1.30
A column in the Leontief Inverse is a vector showing
1. the total increases in Gross Output
2. required directly and indirectly by all activities
3. to meet a 1 unit rise in the final demand for the activity represented by that column.

The sum of the columns is the economy-wide output multiplier: Mnf: 1.76 & Agr: 2.08
Exercises
 2014 IO Table
 Highly aggregated with only 4 Activities
Exercises (cont)
Recommended Range Names (already given!!, check F5)

Use them!!!!!!!
Exercises (cont)
Tasks
 Open file: “Simple IO Multpl 4sct Exercise.xlsx”
 Optional Simple IO Multpl 23sct Exercise.xlsx
 Complete calculations in empty ranges
 Answer questions in worksheets: discuss with partner
 Group Discussion

Refer to this PowerPoint & homework Linear Algebra if necessary

End