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Lecture 11: Input-output table: making of and analysis with Advanced Macroeconomics M.Sc. Programme in Environmental and Natural Resource Economics 1/2007

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Content Basic concepts- –Rationale –Uses Mathematical structure Construction Link with national income account Analysis with I-O table

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production consumption income The circular flow of income-in an economy

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Basic concepts Rationale –Something to link up all the elemetns of the economy-production/income/expenditure Uses- something to help analyse scenarios –Predicting the future –Predicting impacts of changes in exogenous variables-

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Mathematical structure A matrix format-row and column Row for disposal, sale from i to j output Column for use, purchase by j from i input Matrix algebra reduces notation Balance between row and column totals, hence account

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Mathematical structure(2) 3 sectors-1=agriculture, 2=manufacturing, 3=service Each selling and buying from each other Also some final consumption of output Production requires both primary and intermediate inputs So, how does the balance look?

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sectorAgMan.Serv.Final demand Total Ag.X11X12X13f1X1 Manuf.X21X22X23f2X2 Serv.X31X32X33f3X3 LabourL1L2L3 totalX1X2X3 Can you write the equations out? In matrix form?

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Mathematical structure(3) The equation(s) system is: By row: X1 = X11+X12+X13 +f1 X2 = X21 + X22+X23 +f2 X3 = X31 + X32 +X33 +f3 By column: Can you try? What about the matrix form?

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Mathematical structure(4) The matrix form needs some more symbols. Let a ij = X ij /X j Then, rewrite the equation by row as: X i = a ij *X J + fi, for i =1,2,3 In matrix form, it is X = AX + F See how much simpler it is!!!

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Mathematical structure (5) Then what? Solve the equation, at least simplify (I-A)X = F Then, X = (I-A) –1 F So, if we know F and A, we can also know X

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Link with national accounts National accounts: Production-income-expenditures Where are they in the I-O Table? Production-gross output (IO) vs. value added (NA)-so, has to deduct intermediate inputs from gross output Income-as share of primary inputs (IO) and functional incomes (NA) Expenditures –same in IO and NA Advantage of IO – having all three at the same time

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Construction Data requirement Sector classification Control totals Flows between sectors Balancing act between row and column totals Updating with RAS-this is for the advanced student only!!

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Examples: Sector classification: in 1998 IO table, 180x180 sectors, but can be reduced. See Convertor table Agriculture:from 001 to 16 x 16 Sectors 001Agriculture (001-029) 26 x 26 Sectors 001Crops (001-017, 024) 58 x 58 Sectors 001Paddy (001) 002Maize (002) 003Cassava (004) 004Beans and Nuts (006) 005Vegetables and Fruits (007-008) 006Sugarcane (009) 007Rubber (Latex) (016) 008Other Crops (003, 005, 010-015,017, 024)

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Example: Row/column/cell entry at different prices

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Analysis What kind of questions to ask? Eg. Multiplier effect of increased autonomous expenditure Mathematically, X = (I-A) –1 F Eg. Effect of price changes Analysis by column!!

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Application: Tourism What is the effect of SARS on tourism and GDP? What do you need to know in order to analyse this question? Given Tourism IOtable

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Coral reef TOURISM Tourism IO table Change in visitor number fall in tourist expenditure Multiplier effect on GDP Use the tables provided in file TourismIO.xls

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