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North East Regional Economic Model( NEEM)
Overview and Training Session
5. Scenario building and
multipliers
24 June 2008
North East Economic Model. Overview and training session
1
Scenario building
 Simple scenarios involve scaling of all or part of the table,
thus assuming
 Leontief-type production functions
 no input substitution (right angle isoquants)
 No changes in technology
 Marginal spending patterns by sectors are equal to average
spending patterns
 Perfectly elastic supply of inputs (and hence output) - real
prices are unresponsive to demand changes.
 usually implies no capacity constraints
24 June 2008
North East Economic Model. Overview and training session
The Multiplier
The total effect on the economy of a change in one of the final demand sectors
New investment
Production Rises
A portion are
saved, spent
A portion of wages
on imports or
are spent (MPC)
spent in taxation
(MPL = MPS+MPM+MPT)
24 June 2008
North East Economic Model. Overview and training session
New employees
taken on
Wage payments rise
Impact analysis 1
New production
activity
Demand for
Labour
Previously
unemployed
Workers in other
industries
Demand for
other inputs
In-migrants
Commuters
Demand for goods
and services
Locally produced
goods and services
Imports into region
First round leakages
Initial injection
Indirect and
induced
expenditure
within region
Increase in
regional
output, wages,
profits etc.
Imports into
region, taxes
on additional
expenditure,
etc
Taxes, NI, retained
earnings, etc
Increase in
disposable income
Savings of
residents, earnings
to residents from
other regions
Impact analysis - a new plant
 Primary effect
 Direct effect: The income and employment arising at the new
plant
 Secondary effects
 Indirect effect: The income and employment arising out of the
plants demand for inputs
 Induced effect: The income and employment arising as increases
in income are spent within the local economy
24 June 2008
North East Economic Model. Overview and training session
The Multiplier
Numerical Example 1
Assume MPC=0.9 & MPL=0.1
DY
DL
Initial Change
200
Cycle 1
180
20
Cycle 2
162
18
Cycle 3
145
16
Total
2000
200
24 June 2008
North East Economic Model. Overview and training session
The Multiplier
Numerical Example 2
Multiplier
=
Total change in national income
Initial change in national income
Multiplier = 2000 = 10
200
Multiplier
=
1
MPL
24 June 2008
North East Economic Model. Overview and training session
Multiplier = 1 = 10
0.1
Simple regional multiplier
Y  C  I G  X  M
set I, G and X as exogenou s
I  I GG X  X
defi nedi sp osabl ei ncome(DY)
DY  Y-tY
w heret  tax rate
defi neC and M as f u ncti onsof DY
C  C  cDY
M  M  mDY
(1)
Su bsti tuteal l i nto equati on(1)
Y  C  cDY  I  G  X  M  mDY
Su bsti tute( ) i nto ( )
Y  C  c(Y  tY )  I  G  X  M  m (Y  tY )
Remove brackets and move al l terms w i thY to L HS
Y  cY  tcY  mY  mtY  C  I  G  X  M
Si mp l i fy
Y 1  (1  t )(c  m )  C  I  G  X  M
C  I G  X  M
Y
1  (1  t )(c  m )
l et

1
k
 mul ti p l i er
1  (1  t )(c  m )
Y  k C  I G  X  M

Input-output multipliers
 Conceptually similar to the ‘simple multiplier’, but
 An equation for each industry
 Supply chains and intermediate production are included
 Households have several spending functions (c.f. just an average
propensity to consume)
 etc
24 June 2008
North East Economic Model. Overview and training session
Iterating the Table 1
 Calculating technical coefficients
 Manuf buys £40 of inputs from agriculture
 Manuf’s total gross inputs equal £200
 General formula - technical coefficient

40
 0 .2
200
 Where: i=row number, j=column number

X=gross outlay
a ij 
x ij
Xj
24 June 2008
North East Economic Model. Overview and training session
Iterating the Table 2
 The technical coefficients tell us the size of the first round or
direct & indirect effects of any shock
 We also need the higher round effects
 Manufacturing expands (exogenous reason)
 It demand inputs from
 Manufacturing
 Services
 agriculture
 … other firms expand and demand inputs, consumer spending rises.
24 June 2008
North East Economic Model. Overview and training session
Iterating the Table 3
 These higher round effects can be summed and added to the
first round effect to give the total effect on all sectors of the
initial shock
 This can be done efficiently on a computer using matrix
algebra techniques, allowing production of multipliers for
every industry
24 June 2008
North East Economic Model. Overview and training session
Schematic diagram
REST OF UK
SUB-REGIONAL
TRADE
BREAKDOWNS
INDUSTRIAL CLUSTERS
NORTH EAST INDUSTRIAL
SECTORS - PRODUCTION
& SALES
HOUSEHOLDS (REGIONAL
POPULATION)
REST OF WORLD
(INC. BREAKDOWNS)
GOVERNMENT (LOCAL AND
CENTRAL)
CAPITAL INVESTMENT
QUALIFICATIONS
OCCUPATIONS
24 June 2008
North East Economic Model. Overview and training session
15
EachEast
of these
tables is a large
matrix containing
North
Overseas
Imports
various pieces of information.
Theof
‘NE
Domestic
Matrix’ contains
over
North East Agriculture
Rest
UK
Imports
Forestry
Fishing
21,000 cells …
North
East Domestic
Agriculture
Forestry
Agriculture
26.7
0 Fishing
Agriculture8.4 Forestry
Agriculture
0 Fishing
6.1 0
NorthForestry
East Economy 0
Agriculture
6.7 Forestry
0 0 Fishing
00
Agriculture
Forestry
0
0.3
0
Fishing
Forestry
Agriculture
41.8 0
Fishing
00
Fishing
Forestry
0
7.6
Fishing
0
0
Goods and Services within the North Locally
East Economy =
produced +
0
1.2
0
00
0
0
0
0
0.2
0
0.1
0.3
Imports from the rest of
the UK +
Imports from
overseas
16
North East Rest of UK Imports
North EastAgriculture
Overseas Imports
Forestry
North
East Domestic
Agriculture
Forestry
Agriculture
26.7
0 Fishing
Agriculture8.4 Forestry
Agriculture
0 Fishing
6.1 0
NorthForestry
East Economy 0
Agriculture
6.7 Forestry
0 0 Fishing
00
Agriculture
Forestry
0
0.3
0
Fishing
Intermediate
Capital
Household
Government
Purchases
(40x111)
(11x111)
(3x111)
Forestry
1.2
0
Agriculture
41.8 0
Fishing
0 0 & NPISH
0
Sales/
Sales 0 0 Purchases
Fishing
Forestry
(111x111) 0
Fishing
0
0
Wages etc.
Taxes
Tax within the North
Goods and Services
East Economy
=
7.6
0
0
0
Fishing
0.1
0
0
0.2
Export
Sales/
Purchases
(23x111)
Tourist
Spending
(2x111)
0.3
Taxes
Taxes
Taxes
Savings
Locally
The ‘wages’Imports
elementfrom
of the intermediate
Imports
matrix
from the
produced
maps+to ‘social
overseas
accounting
+ matrices’. rest of the UK
17
Wage costs etc.
Incomes by sector and
occupation
(25x111)
FTEs by industry and
occupation
(25x111)
FTEs
Headcounts by FT, PT & self
FTEs by industry and
Incomes
Agriculture
(£m)
Forestry
Fishing
employed by sector
qualification
(3x111) Agriculture Forestry
Fishing(7x111)
Corporate
Managers
Corporate
0
0
Managers in
2664
Managers
agric.in
…
Managers
55.3
and
0
agric.Science
…
techand
prof. …
Science
0
40
23
Qualifications
1.4
0.3
26
64
Degree
or equiv
0.7
0.6
Higher
Education
28
11
1.3 GCE A-Level
0.1 or Equiv
tech prof. …
18