Abstract
This paper identifies a fundamental challenge in the development of inputoutput databases of the world economy intended for analysis of alternative scenarios with a model of the world economy. Primary data sources for individual economies generally do not use the same sectoral classification schemes, in part for lack of coordination and also because not all economies produce all goods. In addition, some economies produce a given good simultaneously using several technologies, sometimes quite distinct in terms of factor requirements and cost structures, information that can and should be retained for scenario analysis. To accommodate the relevant information in a way that is both precise and parsimonious, we introduce rectangular inputoutput matrices and a modeling framework for analyzing them. This framework extends an existing inputoutput/linear programming model, the rectangular choiceoftechnology (RCOT) model, and integrates it into an existing inputoutput/linear programming model of the world economy, the World Trade Model (WTM). The desirable properties of the resulting WTM/RCOT model are illustrated through a numerical example. This formulation requires that a criterion be specified to choose among available options, and we discuss some alternative criteria. Square inputoutput matrices and their inverses are only a special case of this more general formulation, and we show how moving to the rectangular formulation expands the types of questions that inputoutput analysts are able to address.
JEL Classification: C67, C61, F14, O33.
Keywords:
world inputoutput database; rectangular inputoutput matrices; choice of technology model; World Trade Model; linear programming model1 Background
With the launching of this journal, the PanPacific Association of InputOutput Studies seeks to expand its influence to a global community of scholars and to extend its scope beyond what it calls (in the journal brochure) ‘classical inputoutput economics’ by encouraging new approaches to understanding and analyzing relationships among the components of contemporary economic systems. Global financial crisis, urgent environmental challenges, and widespread social unrest are compelling reasons not only to refine our analytic frameworks but also explicitly to hone them for addressing specific critical problems, to collaborate across disciplines for inventing solution concepts to deal with them, and to put our databases, methods, and models to work for the express purpose of evaluating realistic and potentially promising, actionable alternatives. Not surprisingly, there is now a resurgence of research on compiling inputoutput databases and creating inputoutput models of the world economy for undertaking the analysis of such scenarios.
Leontief et al. ([1977]) created the first inputoutput model of the world economy as well as the database to which it was applied. Today, there are freestanding inputoutput databases of the world economy that are available for use with a variety of models, including not only inputoutput models but also general equilibrium models. Several inputoutput databases that cover the entire world economy at substantial levels of regional and sectoral detail are in preparation; they include EXIOBASE (Tukker et al. [2009]), Eora (Kanemoto et al. [2011]), WIOD (WIOD [2011]), and a widelyused one of earlier vintage, GTAP (Narayanan and Walmsley [2008]). Among the inputoutput models, there is a convergence of regional and world modeling approaches and, especially, a sharing of common databases. Regional inputoutput analysis has, for decades, focused on multiplier analysis at the smaller than national level, the multipliers being derived from the inverse of a square matrix. By contrast, the inputoutput models of the world economy have been based on national spatial units and, while these models also used square matrices, it was for the purpose of deriving quantities of output and trade flows and changes in prices under alternative scenarios about the future rather than calculating multipliers. The emerging convergence is due in large measure to the common interest today in exchanges linking a variety of spatial units, such as river basins or urban areas and their hinterlands, in the context of both intracountry and multicountry regions.
This article proposes a solution to a particular problem that became apparent in the course of applying the World Trade Model (Duchin [2005]), a linear programming inputoutput model of the world economy based on comparative advantage subject to resource constraints, to a new environmentally extended inputoutput database of the economy compiled from many sources at an unprecedented level of detail (EXIOBASE). While the problem is more general, it is readily explained by considering only the square (or ‘symmetric’) inputoutput tables representing the economies of the diverse countries and regions of the world. A typical requirement for databases of the world economy is that all tables have the same number n of sectors and that the sectors be defined in comparable ways. Comparability is required to assure the consistency between quantities of goods produced in and exported from the economies of origin and the corresponding imports into the destination economies. The implicit underlying assumption is that every region produces all n outputs, and each output is produced in a given region using a single, average input structure. Thus, if n sectors are to be included in the database, every region will be represented by an inputoutput matrix, A, with n columns and n rows. However, it is not evident what to put in those columns and rows if the original inputoutput table for this region does not identify the corresponding sectors, either because their products are not produced and possibly not even consumed in that region or because they were aggregated in that region’s table with other sectors.
In the database in question, we encountered columns and rows of 0 in these cases. This treatment works as a passive placeholder from a descriptive point of view in that it maintains the formal structure of n rows and n columns, and it appears unproblematic in that it does not affect row totals or column totals in the inputoutput flow table. However, it poses a problem for scenario analysis as a column of coefficients that are all zeroes makes the region appear to have a comparative advantage (because of very low, in fact zero, input costs) in precisely those sectors where it obviously does not. As a temporary fix, we replaced the column of coefficients by equally artificial, large entries (in contrast to the artificially low ones) to be sure the model did not interpret the region as a lowcost producer. This paper proposes a much more precise and parsimonious representation than the trick of fictive columns with extreme values and one that turns out to offer other advantages as well.
We make two assertions about a database with more than a handful of sectors, and contemporary world inputoutput databases aim at many dozens if not hundreds of sectors. First, at least some of the regions will not be equipped to produce some products, and second, for some sectors and regions, it is important to distinguish alternative technologies that both compete with each other for limited resources and may be simultaneously in use. Examples of the former are the extraction of petroleum or rare earth metals, which are obviously concentrated in certain regions and cannot, for physical reasons, be extracted in others even though the resource commodity may be imported and used there. Examples of multiple, potentially simultaneously utilized technological options that need to be distinguished include grain production on rainfed and on irrigated land or the generation of electric power using coal and nuclear fuels, since the options differ in virtually all attributes (namely cost structure, resource requirements, and environmental impact) except that they produce indistinguishable outputs. Naturally, all sectors whose outputs are tradable require that the sectoral output be defined similarly (in terms of a representative output or product mix) in all regions. In what follows, we assume a world economy with n sectors producing potentially tradable goods and services in some, but not necessarily all regions.
In an earlier paper, we introduced the rectangular choiceoftechnology (RCOT) model
(Duchin and Levine [2011]) for allowing several choices of inputcost structures in a given sector and demonstrated
its use both in a model of a single region and in the context of a world economy consisting
of several regions. RCOT is a linear program with both a primal quantity model that
solves for output, trade flows, and factor use, and a dual model that determines product
prices and scarcity rents on fully utilized factors of production. This RCOT model
assumed the same n sectors in all regions but allowed any number of alternative input structures for
each sector in a given region. The RCOT model replaces the familiar square matrices
A (the matrix of intermediate coefficients per unit of output) and I (the identity matrix) by rectangular matrices,
In this paper, we extend the RCOT representation to include the absence of technological options for a sector (i.e., no capacity to produce), a true generalization of the original case (Duchin and Levine [2011]) of 1 through s technological options for a sector to the case of 0 through s options. We also fully incorporate the extended RCOT model into the World Trade Model. The extended World Trade Model (WTM/RCOT) representation has the new feature that a region may use identifiable imported inputs that it cannot produce itself, the socalled noncompetitive imports, that typically are vital for an economy such as resource commodities or capital goods. While noncompetitive imports are often aggregated by money value into a single category in oneregion inputoutput tables, a WTM/RCOT analysis permits them to be explicitly identified. An economy with many noncompetitive imports will generally be represented by a rectangular inputoutput matrix with more rows than columns.
The rest of this paper is divided into four sections. In the following sections we
describe the rectangular inputoutput matrices,
2 Results and discussion
2.1 The rectangular matrices
A
∗
and
I
∗
The rectangular
The database intended for scenario analysis requires several matrices and vectors
in addition to
We assume a world economy of m regions in which n goods and services are produced. The total number of distinct factors of production
that are utilized in all regions combined is k, of which
A numerical example of the original RCOT model showing the case of a region with one or more options for producing each good, both in the oneregion case and in the context of a threeregion world economy, is provided in Duchin and Levine ([2011]). In the following section, we extend the generality of the World Trade Model by incorporating an extended version of RCOT and provide a numerical example for a global system with trade based on regional comparative advantages, where a region may have zero technological options for producing the output of one or more sectors.
2.2 Extending the rectangular World Trade Model
The World Trade Model is a linear program with a quantity primal and a price dual
(Duchin [2005]). In this section, we show the primal; it determines the interregional division
of labor that assures that exogenous domestic final demand is satisfied in all regions
according to a decision criterion represented by the objective function. We choose
a criterion to minimize global factor usage, where the amount of factor usage in each
region is weighted by regionspecific factor prices. This decision contrasts with
the common practice in economic optimization models of maximizing consumption (or
‘utility’). The WTM is written below in terms of
Below is a numerical example that illustrates the properties of the extended WTM/RCOT
model for a threeregion (
1. Industrialized
2. Agricultural
3. Nonindustrialized with mineral resources.
The sectors producing goods and services are as follows:
1. Agriculture
2. Manufacturing
3. Mining.
The factors of production are as follows:
1. Labor
2. Capital
3. Ore
4. Land.
For simplicity, we will assume the same factors in all economies. Numerical values for the variables and parameters are given as follows:
• Region 1: industrialized
• Region 2: agricultural
• Region 3: mineral rich
The
The results of the WTM computation show the following pattern of specialization in
terms of four vectors, where
The division of labor among the three regions that correspond to the lowest global
factor costs has the third region specializing in mining and the second region in
agricultural production. The first region specializes in manufacturing but is also
obliged to produce some agricultural output to supplement its imports from region
2. The reason is that region 2, the relatively lowestcost producer, has run into
a land constraint (the 600 units of land available according to
While region 1 is the only producer of manufactured goods, it needs to deploy both
of its manufacturing technologies for this purpose. The capitalintensive technology
(with the higher capital to labor requirements according to the first two rows of
This example demonstrates the operational nature of the combined RCOT World Trade Model, allowing a determinate solution when regions have different numbers of sectors and factor endowments. It also shows the double functioning of the factor constraints in physical units, both to require more than one region to produce a given good and to require a region to simultaneously utilize more than one technology, in sectors where the relatively lowestcost alternative runs into a factor constraint.
2.3 The price dual
The dual price model determines the world prices for traded goods and scarcity rents
of factors that are fully utilized. It is a distinctive feature of the WTM that factors
have twopart prices: an exogenously given nominal price, received by the owner whether
or not the factor is fully utilized, and an endogenous scarcity rent that is nonzero
if it is fully utilized and zero otherwise (see Duchin and Levine [2011] for a more extended discussion of the twopart prices). The dual results take the
form of two additional endogenous variables:
The price inequality for a particular sector is binding for regions that actually
produce, but it has a nonzero slack for other regions (see Duchin [2005] for the proof). Given the form of the inequality, the world price for a good is set
at the cost of the highestcost producer that actually enters into production. Thus,
the lowercost producers, whose output was necessarily limited by a factor constraint,
earn a rent on that scarce factor that is equal to the difference between the world
price and their own (lower) cost of production. The scarcity rent measures by how
much total factor costs (i.e., the value of the objective function of the primal)
could be reduced if one more unit of the scarce factor was available. It is well known
that at the optimal solution, the primal and dual objective functions have the same
value,
The solution to the price dual for the numerical example is as follows:
and
The existence of two nonzero scarcity rents reflects the already noted facts that capital is scarce in region 1; land, in region 2. Note that an additional unit of land in region 2, allowing it to produce more agricultural output in place of region 1, would reduce global factor costs by more than an additional unit of capital in region 1 (1.05 vs. 0.38 money units), allowing the latter to increase production with its more capitalintensive technology in place of the more laborintensive option.
3 Conclusions
The original rectangular choiceoftechnology model with one or more technological options for each sector is readily implemented for a single region, and it introduces additional flexibility into a oneregion analysis that permits addressing a wider set of questions. However, the reader will note that the prospect of zero technological options was illustrated only for the case of the world model. While it would be useful in the oneregion case also to explicitly itemize the noncompetitive imports, doing so would require an additional extension to the model that we do not undertake here. The defining characteristic of a oneregion model is that trade flows must be provided exogenously. However, an exogenous value for imports of the noncompetitive goods would not, in general, be consistent with endogenously determined demand for these goods under different scenarios. Thus, an additional mechanism for endogenous determination of imports under alternative scenarios would be needed. A fully elaborated way of providing that function in the general case is precisely the inputoutput model of the world economy.
The compilation of inputoutput databases for the world economy is now sufficiently mature that definitions and conventions are needed to assure compatibility of the data taken from various sources at a minimum among the inputoutput tables prepared by individual national statistical offices. Requiring that all use the same classifications for intermediate and factor inputs is overly constraining, however, because in reality they do not all produce and use the same goods and services, and there is no reason to assume that they will in the future. Instead, as we have shown, it is possible to introduce flexibility in two ways. First, it is adequate to require common definitions for tradable goods and services only, and a precise and parsimonious representation is achieved by simply omitting columns for sectors that are, in fact, nonexistent. Second, the existence of simultaneously utilized technologies in place for producing a given good with sharply distinct input structures (e.g., nuclear fuel vs. coal or wind power for generating electricity) can and should be reflected. In fact, such information is often included in the rectangular USE matrices compiled in many national statistical offices and should be retained. The fundamental contribution of the RCOT model is to demonstrate that the general form of an inputoutput system is based on rectangular matrices, a sharp departure from the standard, and unnecessarily limiting, conviction that an inputoutput model requires a square, invertible matrix.
Databases of the world economy are utilized with models of the world economy, and
the models need to be able to manipulate these rectangular matrices. We have demonstrated
the algebra for easily accommodating the absence of particular sectors in a region
and the choice among alternative technologies through the replacement of the identity
matrix I by the more general
Competing interests
The authors declare that they have no competing interests.
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