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[Vol.22 No.3] An Interpretive Analysis of Direct and Indirect Input Requirements in the Input-Output Model

Group :
Economic Research Institute 2016.09.30 3502



Authors: Sang Yul Shim(Econsulting Ltd.), Yoon Kyung Kim(Ewha Womans University)






Many studies recognize the simple multiplier to be important for the estimation of direct and indirect effects, i.e., total effects. The usual analysis of total effects uses the final demand as a source of generating them, where all sectors’ total input requirements of each product are added to be equivalent to the sum of all sectors’ direct inputs of the said product. On the contrary, it is not quite common to utilize total effects of the gross output representing production activity. Depending on business projects and objectives of the research, however, the gross output needs to be considered as a generating source instead of the final demand. This study clarifies the concept and the correct usage of total input requirements, which helps avoid potential confusion about total effects derived from the final demand, the gross output or the output of a specific industry.

The results of this study shows that Sancho (2012) derives the right multiplier for total input requirements of the gross output in view of the basic structures of the input-output model. Sancho’s multiplier is consistent with total input requirements calculated under the condition of equality between total inputs (or production) and total demand. It also includes all the necessary and sufficient inputs, directly and indirectly, to produce one unit of a specific commodity. This study proposes an exogenous industry method to derive Sancho’s multiplier where all the input demand of a specific industry is treated as exogenous constants. In the exogenous model, however, the source of generating total requirements should include the final demand and the derived input demand for the commodity produced in the exogenous industry.