ADDING SUPPLY-DRIVEN CONSUMPTION MAKES THE GHOSH MODEL EVEN MORE IMPLAUSIBLE

Abstract

Guerra and Sancho (2011) argue that adding a supply-driven consumption function to the Ghosh model diminishes its implausibility in the case of centrally planned economies. Extending the Leontief model with a demand-driven consumption function does make that model more realistic. Extending the Ghosh model, however, makes it even more implausible in the case of a market economy, while it becomes even more problematic as a guide for a centrally planned economy. The prime reason is that complementarities between inputs are negated, not only for firms, but now also for households. Consequently, industry and aggregate output may now increase, while corresponding value added decreases, and vice versa.

Keywords:

• Supply-driven input–output model
• Supply-driven consumption function
• Centrally planned economies

Acknowledgements

I thank an anonymous referee for various constructive comments, and the excellent suggestion by the Editor to rewrite my draft comment to more closely resemble a regularly structured article.

Notes

¹ See Dietzenbacher (1997) for a price interpretation of the original Ghosh (1958) quantity model.

² Note that alternative underpinnings are possible, such as the Ghosh story of monopolistic firms mentioned by G&S. However, none of these alternatives offers of a systematic micro economic foundation for the Ghosh model that is comparable to the existing micro foundation of the Leontief model shown in Table 1.

³ Note that it is also credible in the case of the old common agricultural policy of the European Union, where it led to the well-known, shrinking and growing, butter mountains and milk lakes.

⁴ The cost-push price dual of the Leontief model will get an extra feedback loop from the already endogenous consumption good prices via the then also endogenous wage rate and capital price back to the already endogenous output prices (see Oosterhaven, 1981, for a first formalisation and application). The demand-pull price dual of the Ghosh model will get an extra feedback loop from the already endogenous wage rate and capital price via the then also endogenous consumption good prices back to the already endogenous input prices. Hence, the direction of the causality of both price models runs opposite to that of their quantity models shown in Figure 1.

⁵ For Type III, and higher types of IO multipliers, see Batey (1985), or Oosterhaven and Dewhurst (1990).

⁶ In the case of the Leontief model the reason is the absence of any price-quantity interaction. In the case of the Ghosh model the main reason is the supply-driven character of the positive relation between taxes and output.

⁷ From the formulas and from the numerical example it is clear that the “private agent” does not contribute “to the sustainment of the collective”, as opposed to what is stated by G&S (2011, p. 321). Only industries contribute by means of t′.

⁸ As opposed to the original quantity model interpretation, discussed here, Ghosh (1958) can also be interpreted as a value model, with constant quantities. The basic version of that model can be used to study cost-push output price impacts of labour and capital price changes, in terms of value changes (see Dietzenbacher, 1997). An extended Ghosh value model could do the same, but capital and labour prices would then no longer be exogenous, but would be driven by the total consumption price.