Connection of economic variables in the input output table and its contribution to the economic growth estimation

By using input-output models, economists can estimate the change in output between sectors due to input variability in one or more specific industries.For example, a local government wan

Lecturer: Mr Selim Ergun Tutorial Time: Friday 11.30 tutorial

Question 1

a. Introductory review about input-output table

Professor Wassily Leontief created Input-output analysis in the 1930s (Leontief, 1974) Theprimary purpose of the Input-output framework was to analyze interdependencies amongindustries in the economy This method is often used to estimate the effects of positive ornegative economic shocks and analyze spillover effects throughout the economy

The foundation of the input-output analysis relates to the input-output tables Such tables include a series of rows and columns of supply chain quantitative data for all sectors in an economy.

b. Connection of economic variables in the input-output table and its

contribution to the economic growth estimation

The branches are listed in the header row for each row and column The data in eachcolumn corresponds to the amount of input utilized in that industry's production Forexample, the column for car manufacturing lists the resources needed to make cars (e.g.,steel, aluminum, plastic, electronics) The input-output models consider three types ofWorld: direct, indirect, and induced (Rebecca Bess, Zoë O Ambargis, 2011)

By using input-output models, economists can estimate the change in output between sectors due to input variability in one or more specific industries.For example, a local government wants to build a new bridge and needs to verify the investment costs To do so, they hire an economist to do an input-output analysis study for estimating the cost of the bridge, the materials needed, and how many workers the construction company will hire He converts this information into metrics and applies them to an input-output model to find three levels of impact.

- The direct effect of an economic shock is a change in the initial cost For example, building a bridge will cost cement, steel, construction equipment, labor, and other inputs.

- The employment of the input suppliers causes the indirect or secondary impact

to meet work needs.

- The effect, also known as a tertiary effect, occurs because the workers of the supplying companies buy more goods and services.

Input-output analysis can also be performed in reverse to determine which effect

on the input is the cause of the changes in the output.

c Potential contribution of input-output table estimation methods to the estimation of environmental and social sustainable development of an economy

In my opinion, the input-output table estimation method can be considered as a helpful method

in the estimation of environmental and social sustainable development of an economy

due to the following principal reasons First, this method shows the dependence between theoutput and the input of industries in the economy Based on this information, economists canassess the linkages between economic sectors, such as having the most influence, the degree

of dependence between sectors, and what will happen when promoting industry has grownstronger Second, the impact on the three levels mentioned above will provide in-depth impactinformation for economists and policymakers Based on an analysis of the input-output tableestimation method, economists, policymakers can have the best overview of all industries in theeconomic system and give appropriate development directions

However, the input-output table analysis has not considered the price impact, and the financial aspects tend to reduce factors in the macroeconomy Therefore, to estimate an economy's environmental and social sustainable development, it is necessary to apply other analyzes, such as cost-benefit analysis.

Question 2

a Technology Matrix

Figure 2.1: Estimation of the technology matrix of the 35-industry

b Analysis of the input and output of each industry

Assuming 34 industries as the new variable which I have put in the table below For example, the industry of Agriculture, hunting, forestry, and fishing is A.

Variab le

4

11 Other non-metallic minerals K

19 Sale, maintenance, and repair of motor vehicles and motorcycles; retail sale of S

fuel

20 Wholesale trade and commission trade, except of motor vehicles and motorcycles T

21 Retail trade, except of motor vehicles and motorcycles; repair of household goods U

23 Inland transport W

26 Other supporting and auxiliary transport activities; activities of travel agencies Z

Figure 2.2: Labels of new variables

Total demand of industry A = 0.12c1 + 0.00c2 + 0.17c3 + 0.01c4 + 0.01c5 + … +

0.00c33 + 0.00c34 + external demand of industry A

From the input and output data, the technology matrix can be analyzed as:

- For industry A, to produce $c1, it needs to consume 0.12c1 of A

- For industry B, to produce $c2, it needs to consume 0.00c2 of A

- For industry C, to produce $c3, it needs to consume 0.17c3 of A

- For industry D, to produce $c4, it needs to consume 0.01c4 of A

- For industry HH, to produce $c34, it needs to consume 0.00c34 of A

Consequently, from the technology matrix, total consumption of industry A is

caused by other industries.

As a result, the total consumption required by A from other industries is 0.12c1 + 0.00c2 + 0.17c3 + 0.01c4 + 0.01c5 + … + 0.00c33 + 0.00c34 + external demand of industry A

c Estimation and rankings of the total profit(loss) value and profit(loss)

margin of the 34-industry

To calculate profit or loss and margin of 34 industries that consumption is revenue, production is cost Two tables below illustrate the Profit (Loss) and Profit (Loss) Margin ranking from the highest to lowest variables.

Leather, leather products, and footwear 2,880 5,760 (2,880)

Wood and products of wood and cork 4,207 8,414 (4,206)

Textiles and textile products 37,750 75,490 (37,740)

Other non-metallic minerals 38,842 77,684 (38,842)

Manufacturing, nec; recycling 56,100 112,200 (56,100)

Rubber and plastics 108,280 216,536 (108,257)

Agriculture, hunting, forestry, and fishing 143,535 281,249 (137,714)

Mining and quarrying 185,017 368,473 (183,456)

Electricity, gas, and water supply 214,981 429,937 (214,956)

Coke, refined petroleum, and nuclear fuel 237,069 473,724 (236,655)

Post and telecommunications 237,468 474,936 (237,468)

Inland transport 303,893 607,704 (303,811)

Financial intermediation 361,063 721,802 (360,739)

Chemicals and chemical products 417,491 834,365 (416,874)

Machinery, nec 449,772 899,542 (449,771)

Education 573,717 1,147,435 (573,717)

Renting of M&Eq and other business activities 575,670 1,151,323 (575,653)

Hotels and restaurants 610,365 1,220,723 (610,358)

Other community, social, and personal services 625,709 1,251,418 (625,709)

Food, beverages, and tobacco 670,807 1,337,939 (667,132)

Basic metals and fabricated metal 737,843 1,475,681 (737,838)

Electrical and optical equipment 799,084 1,598,167 (799,083)

Retail trade, except of motor vehicles and 808,298 1,616,529 (808,231) motorcycles; repair of household goods

Wholesale trade and commission trade, except 839,530 1,678,837 (839,308)

of motor vehicles and motorcycles

Transport equipment 960,853 1,921,691 (960,838)

Health and social work 1,532,497 3,064,993 (1,532,496)

Public administration and defense; compulsory 1,607,298 3,214,596 (1,607,298) social security

Construction 1,684,393 3,368,780 (1,684,387)

Figure 2.3: Profit (Loss) value of 34 industries in 2015, 2016 , 2017

Mining and quarrying -99.157%

Food, beverages, and tobacco -99.452%

Coke, refined petroleum, and nuclear fuel -99.825%

Chemicals and chemical products -99.852%

Sale, maintenance, and repair of motor vehicles and motorcycles; retail sale of fuel -99.905%

Financial intermediation -99.910%

Pulp, paper, paper products, printing, and publishing -99.946%

Inland transport -99.973%

Wholesale trade and commission trade, except of motor vehicles and motorcycles -99.974%

Textiles and textile products -99.975%

Wood and products of wood and cork -99.977%

Rubber and plastics -99.979%

Electricity, gas, and water supply -99.989%

Water transport -99.989%

Retail trade, except of motor vehicles and motorcycles; repair of household goods -99.992%

Other supporting and auxiliary transport activities; activities of travel agencies -99.994%

Renting of M&Eq and other business activities -99.997%

Other nonmetallic minerals -99.998%

Leather, leather products, and footwear -99.998%

Transport equipment -99.998%

Hotels and restaurants -99.999%

Manufacturing, nec; recycling -99.999%

Basic metals and fabricated metal -99.999%

Air transport -100.000%

Machinery, nec -100.000%

Electrical and optical equipment -100.000%

Post and telecommunications -100.000%

Health and social work -100.000%

Other community, social, and personal services -100.000%

Public administration and defense; compulsory social security -100.000%

Real estate activities -100.000%

Figure 2.4: Profit (Loss) margin of 34 industries in 2015, 2016 , 2017

The profit (loss) variables express the difference between consumption and productionamong 34 industries However, all variables are negative, so they were concluded as theloss variable Additionally, the industry of leather, leather products, and footwear producesthe highest profit, meanwhile the real estate activities industry has the lowest profitablefigure On the other hand, the profit margin presents the profitability of 34 industries, which

is displayed in percentage The industry that comes along with the highest level ofprofitability is agriculture, hunting, forestry and fishing and the lowest profitability belongs

to the education industry Consequently, the profitable figures of 34 industries arenegative, which clearly illustrate Japan's inefficient economy throughout 3 years

d Discussion and conclusion of all above findings

According to the negative result of 34 initial industries of Japan, the overall marketexperienced the decreasing sign of efficiency The reduction in the common economy ofJapan started from 2015 due to many reasons including to the 0.2% decline of the totaldomestic products which marked the end of repetitively 8 growing quarters (Harding 2018).Besides, another reason leading to the ineffective economy was the consequence ofnatural disaster in 2014 which significantly affected the buying power of expenditureindustries (Kajimoto 2018) In 2016, the economy experienced a slight increase due to therising capital expenditure which was driven by the production of cars and semiconductors(Reuters 2018) The positive result of economic development from 2016 leading to themassive growth in 2017 due to the low rate of unemployment and the increasing domesticexpenditure to prepare for Tokyo Olympics 2020 (Partington 2017) Overall, there was aprospective increase of Japan’s economy throughout 3 years but the initial decrease in

2014 and 2015 still affected the overall productivity of 34 industries negatively

Question 3

a Total Output needed to satisfy the change of the external demand

We have the following formula:

Total output matrix (P) = Technology matrix (M) x Total output matrix (P) +

External demand matrix (D)

D2017 new = D2017 x 1.03

Applying the formula to calculate the new Total Output needed to satisfy the

change of the external demand, we get the result in the table below:

(USD million) (USD million)

Figure 3.1: Total output of the 34-industry that needed to satisfy the changes of

external demand incurred in year 2016 and 2017 respectively

b New input-output table for year 2016-2017

Figure 3.2: New 34-industry input-output table for year 2016 and 2017 respectively

c & d Impacts of global economic shock and economic stimulation

policies to the changes of the input-output and profit/loss of industries

5 Leather, leather products, and

7 Pulp, paper, paper products,

9 Chemicals and chemical

supply

motorcycles; retail sale of fuel 223636,58 274275,82 197% 234%

20 Wholesale trade and

commission trade, except of

21 Retail trade, except of motor

vehicles and motorcycles;

26 Other supporting and auxiliary

transport activities; activities of

business activities

31 Public administration and defense; compulsory social

34 Other community, social, and

Figure 3.3: Table presents Profit (Loss) of 34 industries during 2016-2017

From the table, we can see that, for 2016, the global economic shock had a sizable impact

on several Japanese industries To be more detailed, 12 industries experienced losses in

output and profit (Industry code: 3, 12, 14, 15, 18, 20, 21, 29, 30, 31, 32, 33) Renting of M

& Eq and other business activities (Industry code 30) is the one which was most impacted

with a profit reduction of - $185870.72 million equivalent to - 28% profit margin However,

the remaining industries still witnessed strong profit growth, most notably are Leather,

leather products, and footwear (Industry code 5), and Wood and products of wood and

cork (Industry code 6) industries with profit margins of 6364% and 1695%, respectively

In 2017, thanks to the economic stimulus policy of the Japanese government, almost all

the industries grew even though the growth was uneven Following last year's rally,

Leather, leather products and footwear, along with Wood and products of wood and cork,

continued to lead with profit margins of $353878.48 and $535065.94 (equivalent to the

profit margin of 7234% and 1919%) Some industries also have an impressive increase in

profit margin including Textiles and textile products (Industry code 4), Other nonmetallic

minerals (Industry code 11), Manufacturing, nec; recycling (Industry code 16), Air transport

(Industry code 25) Renting of M & Eq and other business activities is the industry with the

lowest profit margin Although the loss in profit was less than in 2016, the computation still

shows that the industry has suffered a heavy loss and makes it the only case of negative

profit margin in 2017

To sum up, the Renting of M & Eq and other business activities is the most damaged

industry by the global economic shock On the other hand, Leather, leather products, and

footwear, along with Wood and products of wood and cork, are the two industries that

have benefited most from the economic stimulation policies of the Japanese government

Question 4

Summary

Professor Wassily Leontief invented the input-output analysis in the 1930s with the mainobjective of analyzing interdependencies among industries in the economy (Leontief,1974) This approach is mostly used to measure the consequences of positive andnegative economic shocks, as well as to investigate spillover effects across the economy.Economists may measure the change in production between sectors due to inputfluctuations in one or more individual sectors using input-output models The method canalso be done backwards to decide which effect on the input is causing the output changes.The input-output table estimation approach is regarded as a useful tool for estimating aneconomy's environmental and social long-term growth

In 34 industries, the profitability results are negative, illustrating Japan's inefficient economy over 3 years The total industry was seen to be less efficient according to the disappointing results of 34 initial sectors in Japan In 2017, almost all sectors expanded, while development was erratic, with the economic stimulus program of the Japanese government Although the net loss was lower than in 2016, the analysis also indicates that the industry experienced a significant loss and is still seeing a negative profit margin in 2017 In general the Japanese economy has been expected to improve over a three-year period, but the initial decline in 2014and 2015 has also adversely affected overall production in 34 sectors

Recommendations

The coming decade gives Japan the chance to transform its course, in part by capitalizing on huge international trade flows, the growth in the developing world of billions of new urban customers, and technological breakthroughs But the current world economy is not just being realigned Japan has the time to take bolder action, larger investments and more profound changes Decades earlier, the world was exposed to "lean" methods by japanese producers These principles can now be applied to emerging markets by companies across the entire Japanese economy and they can make modern technology accessible to them Focus on the goals addressed here will help to tackle lasting legacy problems, and will lead Japan to

recovery and renewal more quickly (McKinsey Global Institute 2015)

Question 5

a Encryption process from encode to decode of the secret messages

Three different messages for the respective three secret agents are:

Message (1): “Attack in North State Street in Chicago on Monday afternoon.”

Message (2) “Attack in Main Street in Dallas at midnight on Tuesday.”

Message (3) “Attack at Diridon Station in San Jose on Friday morning.”