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Metroeconomica 58:3 (2007) 361367

INTRODUCTION: A NOTE ON GOODS AND SERVICES AND


INPUTOUTPUT ANALYSIS

Sergio Parrinello
University of Rome La Sapienza
(August 2005, revised February 2007)

Vendible commodities are usually grouped into two categories: goods and
services. The following widespread characterization of services has been
questioned: (1) services are intangible goods, and (2) the provider and the
user of a service must be spatially contiguous.1 Hill (1999) has convincingly
stressed that services cannot be assimilated to intangible goods. Parrinello
(2004) has argued that a useful distinction between goods and services does
not imply a spatial contiguity between the supplier and the user of services,
but a different timing between the provider activity and the user activity. In
this note we shall formalize this distinction in the framework of inputoutput
analysis.
Goods can be produced in one location during a certain time period, then
accumulated during another period and perhaps in a different place and
finally delivered to their users in still another location. However, some ser-
vices, e.g. informational services on line, do not require a geographical close-
ness between their provider and user. Instead a useful distinction between
goods and services refers to capital and time: produced goods must be first
produced and then consumed as goods; in contrast a produced service is an
activity that is produced and simultaneously used by a production or final
consumption process. We can say that the provider process and the user
process are parallel in the case of services, whereas they are serial in the case
of goods. This seems to be an odd distinction if we think of many activities
commonly called services. For instance, the useful result of a service process
such as cleaning or haircutting seems to accrue only at the end of a
production period (when a certain person is served because his car has been

1
Such a geographical contiguity is frequently mentioned as a constraint that explains the
different mobility of services versus goods in international trade and contrasts with the features
of informational services on line.

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362 Introduction

washed clean or her hairdressing is over) as in the case of the production of


goods. However, the typical nature of a service does not depend on the type
of contractual arrangements adopted to pay for the service itself (see
Parrinello, 2004). It can be paid on a time basis or on a piece basis and in
this case the piece can be a vendible good (a washed clean car) or a non-
vendible entity (a person with well-cut hair). In all such cases car cleaning or
haircutting are similar to specific labour services, although they are per-
formed (produced) by a production process and this process is described by
inputs and outputs of goods and other services beside labour. Therefore, we
maintain that goods and services are different kinds of commodities and their
distinctive features are related to the different timing of the respective pro-
cesses: the provider and the user processes are parallel processes in the case
of services, whereas they are serial processes in the case of goods.
This distinction between goods and services is not revealed by the input
output models, either in the Leontief formulation or in more recent time-
phased versions. In fact, the analytical form of the price and quantity
equations of these models does not allow us to identify which commodities
are goods and which are services. The task of labelling some commodities as
goods and others as services is left up to their empirical implementation. The
lack of this distinction pertains both to the models formulated in terms of
neoclassical production functions and to the LeontiefVon NeumannSraffa
type of models. Parrinello (2004) argues that the co-existence of goods and
services can be revealed by a revised mathematical form of the model, con-
sistently with the proposed definition of goods and services. The different
logical characterization of these two types of commodities has certain theo-
retical implications. We shall examine the following implications. (1) A stock
of services does not exist and services cannot be accumulated as such. (2) The
same dated price must be attributed to the output and to the input of a service
performed during a time period even outside a steady state. (3) A capitalistic
economy cannot be a pure service economy.

A REVISED INPUTOUTPUT MODEL

For the sake of illustration, let us simplify the DOSSO (1958) version of the
dynamic Leontiev model consistently with the definition of goods and ser-
vices illustrated above. We assume a simple n-commodity economy in which
each commodity is produced by a single process (industry) and goods are
non-storable. Therefore we confine the analysis to a simple case of circulating
capital, which rules out the existence of joint production and fixed capital.
All processes have the same duration and a process is conceived as a black

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Introduction 363

box where quantities of goods are observed at the beginning and at the end of
each period. Instead the flows of services are reckoned as simultaneous inputs
and outputs during the period. The time profile of the quantities of goods and
services within the period is not specified.
Let the n commodities be goods 1, 2, . . . , m and services m + 1, m + 2, . . . ,
n. The n-square inputoutput matrix can be written in the partitioned form:

Gg Gs
S Ss
g

where:

Gg: good input/good output square matrix of order m


Sg: service input/good output matrix of order (n - m)m
Gs: good input/service output of order m(n - m)
Ss: service input/service output square matrix of order n - m.

Let us denote:

lg, ls: labour coefficient row-vectors of goods and services industries


xg, xs: gross output column-vectors of goods and services industries
yg, ys: final demand column-vectors of goods and services
L: total labour employment.

The quantity equations:


x g (t 1) = G g x g (t ) + Gs xs (t ) + yg (t ) (1)

xs (t ) = Sg x g (t ) + Ss xs (t ) + ys (t ) (2)

L(t ) = l g xg (t ) + l s xs (t ). (3)
Ggxg(t) + Gsxs(t) is a vector of capital goods available at the start of period t
and used as circulating capital during the period. Instead Sgxg(t) + Ssxs(t) is a
vector of service flows produced during period t and used by the n industries
during the same period.
Let pg, ps be column-vectors of not discounted prices goods and services; w
the wage rate and r the own rate of interest on the numeraire.
The intertemporal equilibrium price equations:
pg (t + 1) = (1 + rt )G Tg pg (t ) + STg ps (t ) + l gT w(t ) (4)

ps (t ) = (1 + rt )G Ts pg (t ) + STs ps (t ) + l Ts w(t ) (5)

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364 Introduction

where the suffix T means transposed.

COMMENTS

(a) The quantity equations admit stocks of goods (circulating capital), but
not stocks of services and they show that a service cannot be accumulated
as such. For example, the production of electricity in a certain period
provides a service that seems to be capable of being accumulated, because
electricity can be used to charge a battery that is apt to supply electricity
in the following periods. However, saying that in this case the service is
accumulated is not consistent with the term accumulation used in eco-
nomics. One Kwh of electricity cannot be accumulated as a ton of corn.
The latter maintains its physical identity of good when it is stored,
although it can be subjected to depreciation. Instead an accumulated
Kwh loses the identity of service because, using the words of Adam
Smith, it fixes itself into a good (a charged battery). Afterwards, the latter
can be used, jointly with other means of production, to provide further
electric energy, but such a service may not possess the same character-
istics of the amount of electricity used to charge the battery (e.g. perfectly
continuous current instead of alternate current converted in continuous
one).
(b) The same dated price is attributed to the output and to the input of a
service in the price equations (4) and (5). This is a sign of the simulta-
neous production and consumption of a service. If we assume that all
services are paid ex ante (i.e. at the beginning of the period), the price
equations should be written:
pg (t + 1) = (1 + rt )[G Tg pg (t ) + STg ps (t ) + l Tg w(t )] (4)

ps (t ) = G Ts pg (t ) + SsT ps (t ) + l Ts w(t ). (5)


(c) Suppose that technical progress is concentrated only in the goods indus-
tries. Assume the ideal case in which all technical coefficients of Gg, Sg, lg
tend to zero as time t tends to infinity, whereas Gs, Ss, ls remain constant.
At the limit the price equations (4) and (5) become
pg (t ) = 0
. (6)
ps (t ) = SsTps (t ) + l Ts w(t )

This special case shows that a pure service economy is not capitalistic,
although it might possess an advanced technology. It is a labour

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Journal compilation 2007 Blackwell Publishing Ltd
Introduction 365

economy with heterogeneous services, some of which are original,


whereas others are produced. In fact, the existence of at least one not
free good is necessary for the existence of a capitalistic economy. It
could be objected that our result, described by equation (6), depends on
the assumption that wages are paid ex post (i.e. at the end of the
period) and, in contrast, a capitalistic economy would re-emerge if
wages were assumed to be paid ex ante. This claim would suggest that
the price equation for services could have been written in the form
ps (t ) = SsTps (t ) + (1 + rt )l sT w(t ) where profits re-appear. However, this
alternative price equation is not consistent with a pure service economy,
because it would make sense only if some valuable wage good exists and
is available to the workers at the beginning of the period. Instead only
wage services exist under our hypothesis and therefore no valuable com-
modity can be anticipated as capital. In our case real wages cannot be
made available ex post or advanced as circulating capital, because they
consist only of flows of services that are produced and consumed during
the same period.
(d) The previous ideal case might reflect the belief that the service sector
performs laggard activities relatively to the goods sector. However,
nothing in the definition of services illustrated above suggests that the
productivity growth (both in the sense of direct labour productivity and
in that of some total input productivity associated with vertically inte-
grated sectors) is lower in the service industries compared with the goods
industries.

THE TRADITIONAL INPUTOUTPUT MODEL REINTERPRETED AS A


REDUCED FORM

Let us assume that the inverse matrix (I - Ss)-1 exists and is semipositive. By
1
substitution of the solution to equation (2), x s (t ) = ( I Ss ) [ Sg x g (t ) + y s (t )] ,
into equation (1) we obtain the following equation where only quantities of
goods are represented:
x g (t 1) = Ax g (t ) + Y(t ) (7)

where A Gg + Gs(I - Ss)-1Sg and Y(t) Gs(I - Ss)-1ys(t) + yg(t).


By substitution of the solution to equation (5), p s (t ) =
T 1
( I Ss ) [(1 + rt )Gs pg (t ) + l s w(t )] , into equation (4), we obtain the following
T T

equation where only the prices of goods are represented:

pg (t + 1) = (1 + rt )ATpg (t ) + l T w(t ) (8)

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366 Introduction

where I T STg ( I SsT )1 l Ts + l gT.


Equations (7) and (8) show that the standard inputoutput model can be
interpreted as a reduced form deduced from a structural model with goods
and services. This form represents relations among quantities and prices of
goods only.

STEADY STATES

Under stationary conditions, characterized by constant quantity propor-


tions and constant relative prices, the quantity equations (1) and (2)
become

x g = (1 + g )G g x g + Gs xs + c g (1*)

xs = (1 + g )Sg x g + Ss xs + c s (2*)

where g is the uniform and constant rate of growth and cg, cs are consumption
column-vectors of goods and services.
The price equations (3) and (4) become

pg = (1 + r )G Tg pg + STg ps + l Tg w (4*)

ps = (1 + r )GsTpg + SsT ps + l Ts w (5*)

where r is the uniform and constant rate of profit.


Let the input matrix A Gg + Gs(I - Ss)-1Sg represent a viable technology,
such that I - A satisfies the HawkinsSimon conditions, and assume that the
uniform rate of profit and rate of growth fall within their feasible range
associated with the largest real eigenvalue of matrix A. Such assumptions
guarantee that the quantities of goods, determined by equations (1*) and (2*)
for given positive levels of consumption cg, cs and the prices of goods, deter-
mined by equations (4*) and (5*), are positive. However, they are not suffi-
cient for having positive quantities and prices of services. In fact, we need
restrictions on the coefficients of the structural form in order to satisfy both
positivity requirements. Not only the technology represented by matrix A,
Gg Gs
but also the technology described by the whole partitioned matrix
Sg Ss
must be viable.

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Introduction 367

CONCLUSIONS

Inputoutput models should be reconsidered in the light of the formulation


illustrated in the present note. They need a certain revision if they have to
describe an economy in which goods, labour services and produced services
co-exist.
It should be stressed that our distinction between goods industries and
service industries is based on a purely technical classification between serial
and parallel processes. In fact, we have not specified if the provider process
and the user process belong to the same or to different organizations (e.g.
firms), in the same vein as the standard inputoutput model. This further
distinction should be added to the former if we are interested in the analysis
of outsourcing phenomena and it would require an integration of input
output models with organization theory. Within such extension, the choice of
the cost-minimizing system of production would include the choice of tech-
nical processes and the choice of the economic organizations in terms of firms
and markets. Transaction cost analysis, initiated by Coases seminal contri-
bution, may represent a typical perspective in this direction.

REFERENCES

DOSSO (Dorfman, R., Samuelson, P., Solow, R.) (1958): Linear Programming and Economic
Analysis, McGraw-Hill, New York.
Hill, T. P. (1999): Tangibles, intangibles and services: a new taxonomy for the classification of
output, Canadian Journal of Economics, 31, April, pp. 42647.
Parrinello, S. (2004): The service economy revisited, Structural Change and Economic Dynam-
ics, 15 (4), pp. 381400.

Sergio Parrinello
Dipartimento di Economia Pubblica
Universit degli Studi di Roma La Sapienza
Piazzale Aldo Moro 5
I-00185 Roma
Italia
E-mail: sergio.parrinello@uniroma1.it

2007 The Author


Journal compilation 2007 Blackwell Publishing Ltd