Armstrong and Taylor

Armstrong and Taylor

In the previous chapter, we saw how models of the regional economy could be constructed in order to provide some insight into the major determinants of output and employment levels. Although these models were initially simplistic and focused attention only on the major regional aggregates (such as regional income and employment), there has recently been a proliferation of far more detailed models based upon time series data. A major requirement of these models, however, is a data set which spans several years, preferably at least a decade. An alternative approach to modelling regional economies is to construct a detailed snapshot of the input-output linkages that exist within a region. This can then be used for predicting the consequences of any planned or potential changes in the demand for the region's output. The technique was developed by Leontief during the nineteen thirties and has since been used in a wide range of applications, including regional impact analysis.

The input-output method is based upon the simple, but fundamental, notion that the production of output requires inputs. These inputs may take the form of raw materials or semi-manufactured goods, or inputs of services supplied by households or the government. Households provide labour inputs whilst the government supplies a wide range of less visible services such as national security. Having purchased inputs either from other producing sectors, households or the government, an industry then produces output and sells this either to other producing sectors or to 'final demanders', such as households, the government, residents of other regions or to firms for investment purposes.

Exactly how input-output models are constructed, and the uses to which they can be put, is the subject matter of this chapter. The first part of the chapter deals with the construction of input-output models in general; the second part examines a number of interesting (and quite different) applications of regional input-output modelling.

THE INPUT-OUTPUT APPROACH TO MODELLING

Two point one. The Input-Output Method