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

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

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

4. 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-

5. 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

6. 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?

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

8. 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?

9. 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!!!

10. 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

11. 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

12. 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!!

13. 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)

14. Example: Row/column/cell entry at different prices

15. 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!!

16. 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

17. 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