Conclusion and Implications
This paper analyzes the multipliers from the conventional IO analysis and reinforces the
LP method to calculate modified multipliers, from both a theoretical aspect and
numerical examples. In short, if exogenous capacity limitations are imposed on
production directly, the modified multipliers should be used for regional economic
analysis. This is because the conventional approach tends to overestimate the output
multipliers. This is important especially when researchers and/or policy makers design
the policies for recovering or boosting economy which might be suffering from the
capacity limitations on production. Otherwise, economic loss would not be fully
recovered. Net gain to use the modified multipliers can be huge in a relatively large
scales economy such as national or state levels.
One caveat is that this analysis is short-run analysis. In the long run, the final
demand in restricted sector would be adjusted, most likely decreases, which means the
final sector is not exogenous any more, and in turn all the coefficients in the direct
requirement matrix and multipliers are readjusted. This is not possible here. However,
one possibility is that we might update IO table using another LP set up as discussed in
Ghanem (2004), RAS method (Schneider and Zenios, 1990), or Minimum Cross Entropy
(CE) method (Robinson et al., 2001). This would be the further study.
References
Bazaraa, M.S., J.J. Jarvis, and H.D. Sherali. (1990) Linear Programming and Network
Flows. Second Edition, John Wiley & Sons.
Brink, L., and B.A. McCarl. (1977) “Input-Output Analysis, Linear Programming and the
Output Multiplier.” Canadian Journal of Agricultural Economics, 25(3):62-67.
14