The Supply-Driven Input-Output Model: A Reinterpretation and Extension

Most previous efforts have focused on constructing various demand-driven IO models because of their widely accepted usefulness in regional science. After Ghosh’s suggestion of the supply-driven IO model, a debate over its plausibility ensued. Much of this was resolved with Dietzenbacher’s (1997) suggestion of the interpretation of a price model, equivalent to Leontief’s price model. However, in static market equilibrium, producers will not change the current technical relationships that are based on historical sales during the immediate period after an exogenous event. This reflects the fact that Ghosh’s supply-driven model is in terms of monetarily expressed quantities and hence applicable when using the supply-side IO in the circumstance of static market equilibrium with abnormal economic cessations. To suggest a new interpretation for the supply-driven IO model, a four-quadrant space of economic situations is introduced, using ‘price vs. price-quantity’ and ‘increase-decrease’ axes. Furthermore, even in the case that normal market equilibrium is not maintained, instead of the direct use of supply-side quantity model, Ghosh’s case can be switched to a price-type supply-driven model, and play a role in estimating economic impacts. To address this switching process, exogenous price elasticities of demand are combined with the supplydriven model, adjusting quantity responses to price impacts. This logic will underlie the theoretical background necessary to utilize the supply-side model, and hence the first essay highlights the power and the usefulness of linear models by clarifying the applicability of the supply model.