A supply-driven model consuming simultaneously all primary inputs: unfolding analytical potential beyond the Ghosh model

Abstract

The Ghosh model fails to endogenise the simultaneous consumption of primary inputs and, consequently, is unused. It is argued that this limitation stems from being specified mirroring the Leontief model. In particular, primary inputs are considered homogeneous and independent despite being heterogeneous and (intersectorally) dependent. A new supply-driven model endogenising the consumption of all primary inputs except the one driving the model is developed. It displays new features: structural linearity and structural variability. An input multiplier analysis illustrates that the new model's total requirements matrix represents the actual structure of the economy, overcoming the Ghosh model's ‘limitation’. Also, it is exemplified how to use complementary information from the Ghosh model to deepen structural analyses. Thus, this paper solves a long-lasting theoretical inconsistency in IO modelling and unfolds new analytical potential, hopefully rekindling the interest in supply-driven analyses.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 As a recall, $\mathbf{v}$ is the primary input row, $\mathbf{x}$ the total inputs/outputs, $\mathbf{f}$ the final demand, $\mathbf{i}$ a vector full of ones, $\mathbf{Z}$ the intersectoral matrix, $\mathbf{A}$ the direct requirements (or technical coefficients) matrix defined for a demand-driven model, $\mathbf{B}$ the direct allocations (or technical coefficients) matrix defined for a supply-driven model, $\mathbf{G}$ the total allocations matrix defined for the Ghosh model, and $\mathbf{L}$ the total requirements matrix defined for the Leontief model.

2 Some endogenous variables already present intersectoral linearity, e.g. primary inputs are intersectorally linear when using the Leontief model, and final outputs are also intersectorally linear when using the Ghosh model. However, it is important to distinguish this relationship from conventional intra-sectoral linearity since new models can be specified to present such behaviour in variables which did not present it previously, e.g. primary inputs in a supply-driven model.

3 PIOTs are different than environmentally extended monetary IOTs (EE-MIOTs) in that the core of the EE-MIOT is in value units and they have homogeneous final outputs as in traditional MIOTs, i.e. the environmental coefficients do not count as heterogeneous final goods.

4 Here: $\theta =\frac{{v_{1,1}^{\ast }}^{\mathrm{exo}}}{{v_{1,1}}^{\mathrm{exo}}}=\frac{175}{350}=0.5$.

5 Note the Brazilian MIOT is built assuming imports are non-competitive and, thus, they are treated as primary inputs. Imported final goods were not included in the MIOT for simplicity. The row ‘imports and taxes’ aggregates imported goods and taxes on national production and imports. None of the categories of this row contribute to value-added. See United Nations (1999, chap. IV) and Su and Ang (2013) for a discussion on the IOT structures associated with the competitive and non-competitive imports' assumptions.

6 Following common practice (Miller & Blair, 2009), the value-added row aggregates the rest of primary inputs: wages, gross operating surplus and gross mixed income, and other taxes and subsidies.