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Modeling input-output impacts with substitutions in the household sector: A numerical example

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  • Gordon, Peter
  • Park, JiYoung
  • Richardson, Harry W.

Abstract

Although there have been many elaborations of the basic input-output approach, including multi-regional models, dynamic models, models with variable coefficients, supply-side models, etc., these approaches all have the same limitation. The fixed-coefficients production function assumptions ignore substitutions in response to price changes that can be expected to accompany most shocks-- skipping over the heart and soul of market economics. This research note suggests a simple approach to estimating new technical coefficients matrices after a shock so that the consequences of short-term substitution effects can be studied. Given a reduction in income (as reflected in the value added row), households are likely to make substitutions, reducing their final demand by less than the application of base-year I-O coefficients would indicate. But if ex post changed income and consumption can be observed, the application of RAS procedures can generate an appropriately modified A matrix. The resulting set of interdependent substitutions that occurred can be identified. Due to some well known limits in applying the traditional RAS approach, we reformatted it and suggest a new economic model that can link coefficient adjustments to degrees of a priori substitutability and complementarity. Based on this resolution, we look forward to detailed studies of specific coefficients and how they evolve over the short term.

Suggested Citation

  • Gordon, Peter & Park, JiYoung & Richardson, Harry W., 2009. "Modeling input-output impacts with substitutions in the household sector: A numerical example," Economic Modelling, Elsevier, vol. 26(3), pages 696-701, May.
  • Handle: RePEc:eee:ecmode:v:26:y:2009:i:3:p:696-701
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    References listed on IDEAS

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    1. J R Roy & D F Batten & P F Lesse, 1982. "Minimizing Information Loss in Simple Aggregation," Environment and Planning A, , vol. 14(7), pages 973-980, July.
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    Cited by:

    1. Jeroen Klijs & Jack Peerlings & Wim Heijman, 2015. "Usefulness of Non-Linear Input—Output Models for Economic Impact Analyses in Tourism and Recreation," Tourism Economics, , vol. 21(5), pages 931-956, October.
    2. Stamopoulos, Dimitrios & Dimas, Petros & Tsakanikas, Aggelos, 2022. "Exploring the structural effects of the ICT sector in the Greek economy: A quantitative approach based on input-output and network analysis," Telecommunications Policy, Elsevier, vol. 46(7).
    3. Llop, Maria, 2020. "Energy import costs in a flexible input-output price model," Resource and Energy Economics, Elsevier, vol. 59(C).

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