Exercises Trade, Environment, and Growth 2018

1.

Consider the following input-output table, all figures are in billion dollars.

Agri Manuf Serv FD Total

Agriculture 320 200 90 190 800
Manufacturing 320 400 30 250 1000
Services 0 100 120 80 300
Value added 80 200 30 0 310
Imports 80 100 30 0 210
Total 800 1000 300 520
FD = final demand

a. Determine the matrix A with input coefficients and the matrix B with coefficients
for value added and imports.
b. The Leontief inverse matrix is given by

35 15 20
1
𝐋 = (𝐈 − 𝐀)−1 = 15 [24 36 18]
4 6 28

What is the interpretation of 𝑙23 (i.e. the element in row 2, column 3).
c. The final demand next year is forecasted to be 150 for agricultural goods, 300 for
manufacturing products, and 75 for services. Assume that the production structure
remains fixed. Determine next year’s production levels (i.e. outputs), GDP (i.e. the
sum of all values added) and the total amount of imports.
d. Suppose the exports of manufacturing will increase by 150 million dollars. By how
much will the (domestic) value added increase and by how much will the imports
increase?
e. Again, suppose the exports of manufacturing will increase by 150 million dollars.
What will happen to the value added generated in agriculture and to the imports of
the services industry?

2.

The matrix A with input coefficients, the matrix B with direct input coefficients for the
factors labour and capital, and the Leontief inverse L are given as follows.

0.5 0.2 0.1 0.2 2.4 0.8

𝐀=[ ], 𝐁 = [ ], 𝐋 = (𝐈 − 𝐀)−1 = [ ]
0.25 0.4 0.1 0.1 1 2

a. For one dollar of output of product 2, how much is required of: product 1; product
2; labour; and capital.
b. For one dollar of final demand for product 2, how much is required of: product 1;
product 2; labour; and capital.

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c. Suppose the final demands are: 50 for product 1 and 150 for product 2 (in billion
dollars). Construct the input-output table for this case, taking into account that each
industry also imports.
d. How much labour is embodied in the final demands for product 1 and how much
capital is directly and indirectly required to satisfy the final demands for product 2?
e. Calculate the output (or production) multipliers.
f. Suppose the government aims at increasing employment and it will spend 10 billion
dollars extra on buying products for investment purposes. (Recall that investment
expenditures are part of the final demand vector.) Suppose also that the average
wages in industry 1 are 25% lower than those in industry 2. What would you
recommend the government to do (i.e. buy only product 1, buy only product 2, or
buy a mix of both products)?

3.

Consider the following input-output table, all figures are in billion dollars.

Agri Manuf Serv FD Total

Agriculture 60 5 5 30 100
Manufacturing 0 60 40 0 100
Services 20 10 10 60 100
Value added 10 15 15 0 40
Imports 10 10 30 0 50
Total 100 100 100 90
FD = final demand

a. Determine the matrix A with input coefficients and the matrix B with coefficients
for value added and imports.
b. The Leontief inverse matrix is given by

32 5 4
1
𝐋 = (𝐈 − 𝐀)−1 = 12 [ 8 35 16]
8 5 16

Calculate for the final demand for agricultural products, how much is imported by
agriculture, how much by manufacturing, and how much by services. Do the same
for the final demand for manufacturing products and for the final demand for
services. Put the answers in a 3 × 3 table and calculate the row and column totals.
This table exactly reflects “who imports how much for whom?”.
c. Suppose that the government can increase its expenditures with 1 billion dollars in
order to stimulate economic activity. The aim is to increase GDP as much as
possible. How should the government spend this extra money?
d. Suppose that the prices of imports will increase next year with 12%. Determine the
new input-output table for that situation.

4.

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The matrix A with input coefficients and the Leontief inverse L are given as follows.

0.5 0 0.2 2.4 0.4 1.2

−1
𝐀 = [0.2 0.4 0 ], 𝐋 = (𝐈 − 𝐀) = [0.8 1.8 0.4]
0.1 0.2 0.6 1 1 3

The input of the primary factor labor can be represented in two ways. On the one hand,
as wages and salaries measured in monetary terms and, on the other hand, as the volume
of physical labor measured in working years. This information is given in the table
below, along with the gross outputs.

Industry 1 2 3
Output (billion dollars) 200 280 360
Wages and salaries (billion dollars) 20 56 18
Labor volume (1000 working years) 400 1400 270

a. Calculate the output (or production) multipliers, the employment multipliers, and
the income (or, actually, wages and salaries) multipliers.
b. Suppose that the exports of product 1 increase with 10 billion dollars, those of
product 2 with 30 billion dollars, and those of product 3 with 20 billion dollars.
What are the consequences of this change for the wages and salaries and for the
employment?
c. What does this mean for the average wage rate in this country?
d. How much labor is involved in every billion dollar of exports by industry 1?
e. How many more workers have a job in industry 2 if the exports in industry 3
increase with 1 billion dollar?

5.

The matrix A with input coefficients, the Leontief inverse L, and the matrix B with
direct coefficients for the primary inputs are given as follows.

0.6 0 0.2 3 0.4 1 0.1 0.1 0.2

𝐀 = [ 0 0.5 0 ], 𝐋 = (𝐈 − 𝐀)−1 = [0 2 0], 𝐁 = [0.06 0.15 0.1]
0.2 0.2 0.4 1 0.8 2 0.04 0.05 0.1

The primary inputs are labour (in row 1), capital (row 2), and imports (row 3). Due to
problems in the EMU it is expected that the exports of this country will decrease and
that the imports of foreign products will become cheaper.

a. Suppose that the exports of products 1, 2, and 3 decrease with 300, 1000, and 500
million euros, respectively. As a consequence, also the imports will decrease. How
much in industry 1, industry 2, and industry 3?
b. How much will the total import decrease (i.e. of all three industries together) for
every million euro decrease in the exports of product 1? Answer the same question
for products 2 and 3.
c. Suppose that the price of imported products decreases with 10%. How does this
affect the prices of the exported products?

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6.

Consider the following input-output table, all figures are in million euros.

Agri Manuf Serv FD Total

Agriculture 32,000 2,000 600 45,400 80,000
Manufacturing 6,400 61,000 1,800 130,800 200,000
Services 4,800 1,000 900 113,300 120,000
Imports 16,400 35,000 19,200 59,900 130,500
Wages and salaries 9,600 73,000 88,200 0 170,800
Other 10,800 28,000 9,300 0 48,100
Total 80,000 200,000 120,000 349,400
FD = final demand

In addition, the number of workers (in 1000 fte) is 212 in agriculture, 1266 in
manufacturing, and 1134 in services. If the matrix with input coefficients is denoted by
A, the Leontief inverse L (all figures rounded to four decimals) is given by

1.6708 0.0241 0.0088

𝐋 = (𝐈 − 𝐀)−1 = [0.1945 1.4418 0.0228]
0.1020 0.0087 1.0082

a. Calculate the production multipliers, the employment multipliers, the income

multipliers, and the import multipliers.

The minister of foreign affairs managed to arrange a contract for the delivery of ships
to South Korea to the amount of 200 million euros. The ships are produced in the
manufacturing industry.

b. What will be the effect of this new contract—in each of the three industries—for:
the production; the imports; the employment; and the wages and salaries.
c. What is the average wage (and salaries) rate in this country in the original situation?
What is average wage rate of extra workers that are employed because of the new
contract? Explain the difference.

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7.

Consider the following input-output table, all figures are in million euros.

Agri Manuf Serv FD Total

Agriculture 40 14 16 50 120
Manufacturing 20 80 10 140 250
Services 20 60 130 190 400
Imports 12 35 72 - 119
Wages and salaries 9 45 124 - 178
Other 19 16 48 - 83
Total 120 250 400 380
FD = final demand

In addition, the number of workers (in fte) is 198 in agriculture, 600 in manufacturing,
and 2000 in services. If the matrix with input coefficients is denoted by A, the Leontief
inverse L (all figures rounded to three decimals) is given by

1.566 0.164 0.099

𝐋 = (𝐈 − 𝐀)−1 = [0.403 1.532 0.081]
0.530 0.585 1.535

a. Calculate the production multipliers, the employment multipliers, the income

multipliers, and the import multipliers.
b. The forecast for next year is a shift in the final demand composition. The final
demand is expected to increase with 10 million euros for agricultural products and
with 20 million euros for manufacturing products. It is expected to decrease with
30 million euros for services. Calculate the effects on the employment and on the
wages and salaries, for each of the three industries.
c. An increase of the exports of product i with 1 million euros will improve the
position of the balance of payments (BoP). This improvement will be less than 1
million euros though. This is because extra exports generate extra imports. Develop
an indicator that might be termed “BoP multiplier” and do the calculations.

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8.

Consider the following input-output table and additional employment data. All figures
in the input-output table are in million euros.

Ag Mi Me Ma Co Se C I E Tot
Ag 1063 22626 8646 212 0 359 3089 10588 6422 53005
Mi 9759 40479 9952 7618 715 8223 11724 25742
38986 24445
3 0
Me 1463 5334 1306 2509 381 8092 77974
11802 34493 840
0
Ma 2374 12248 3657 17712 1817 5137 14574
59747 26125 16927
4
Co 372 855 252 1605 3453 820 7593 16428 1128 32506
Se 631 10496 1492 5422 1694 11971 19506
74855 16648 71860
9
PI 3734 16538 4091 11066 2444 16046 - - - 53921
3 2 5 6 6 7 9
To 5300 25742 7797 14574 3250 19506 19607 12872 21442
t 5 0 4 4 6 9 2 7 0
Employment (in thousand person years)
277 914 395 1262 181 1726
Notes: Ag = Agriculture; Mi = Mining; Me = Metal-related manufacturing; Ma = Other
manufacturing; Co = Construction; Se = Services (public and market); C = Private and government
consumption; I = gross fixed capital formation (investments); E = exports; PI = Primary inputs (i.e.
value added plus imports); Tot = Total.

The matrix A with input coefficients is as follows:

0.02 0.09 0.12 0.00 0 0.00

0.18 0.16 0.13 0.05 0.02 0.04
𝐀 = 0.03 0.02 0.17 0.02 0.01 0.04
0.04 0.05 0.05 0.12 0.06 0.03
0.01 0.00 0.00 0.01 0.11 0.00
[0.01 0.04 0.02 0.04 0.05 0.06]

and the Leontief inverse yields

1.05 0.11 0.16 0.01 0.01 0.01

0.24 1.23 0.23 0.08 0.04 0.07
𝐋 = (𝐈 − 𝐀)−1 = 0.04 0.04 1.22 0.03 0.02 0.06
0.07 0.08 0.09 1.15 0.08 0.04
0.01 0.01 0.01 0.01 1.12 0.01
[0.03 0.06 0.04 0.05 0.07 1.07]

Its column sums are:

1.44; 1.52; 1.74; 1.34; 1.34; and 1.26.

The coefficients with primary inputs per unit of output are:

𝝁′ = (0.70 0.64 0.52 0.76 0.75 0.82)

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The labor input coefficients (person years per million euros of output) are:

𝜽′ = (𝟓. 𝟐𝟑 𝟑. 𝟓𝟓 𝟓. 𝟎𝟕 𝟖. 𝟔𝟔 𝟓. 𝟓𝟕 𝟖. 𝟖𝟓)

The employment multipliers are given by:

𝜽′ 𝐋 = (7.47 6.37 8.94 10.96 7.80 10.47).

Some additional matrices are the following.

14.83 14.58 5.25 0.89 0.12 1.68

3.12 142.24 6.85 5.36 0.68 7.13
̂ 𝐋𝐟̂
𝝁 1.56 0.29 4.84
= 0.46 3.69 30.08
1000 1.07 10.49 3.11 89.56 1.47 4.96
0.16 0.93 0.27 1.15 21.19 0.75
[ 0.46 8.75 1.57 4.28 1.40 144.01]

where 𝐟 indicates the vector with final demands (i.e. the sum of C, I, and E in the
input-output table) and where a “hat” is used to indicate a diagonal matrix. Denote the
investment vector by 𝐟𝐼 , then

57.95 14.63 28.50 1.69 0.56 1.27

9.08 106.36 27.72 7.53 2.46 4.02
̂ 𝐋𝐟̂𝐼
𝜽
= 2.35 4.82 212.48 3.82 1.83 4.76
1000 6.44 16.19 25.97 259.55 10.97 5.76
0.61 0.93 1.49 2.16 102.49 0.57
[ 2.62 12.74 12.36 11.69 9.83 157.85]

For the questions a – e, suppose that the exports of metal-related manufacturing

products increase with 10 million euros.

a. How does this affect the production in the mining industry?

b. What is the effect on the total (i.e. national) output?
c. What happens with the primary inputs in agriculture?
d. How does total employment change?
e. What is the effect for the employment in the services sector?

The following questions refer to the situation as given in the input-output table.

f. How much agricultural production is necessary for (or embodied in) the exports of
other manufacturing?
g. How much agricultural employment is necessary for (or embodied in) the exports
of other manufacturing?
h. The exports of other manufacturing induce the delivery of intermediate inputs from
mining to construction. What is the value of this delivery and how many mining
workers are involved?
i. How much primary inputs in construction and services (taken together) are
embodied in the final demand for agricultural products?
j. How much primary inputs in construction and services (taken together) are
embodied in the final demand for all the other products (Ag, Mi, Me, Ma)?
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k. How much mining employment is involved in the investments of construction?
l. How much employment in agriculture and mining is involved in all investments?

9.

Consider the following world input-output table and additional emissions data, where
the world consists of three countries and where we have distinguished just two very
broad industries. All figures in the input-output table are in million euros.

Alberia Botsonia Crapstan Final demand

Man Serv Man Serv Man Serv A B C Tot
M 1063 22626 8646 212 0 359 3089 10588 6422 53005
A
S 9759 40479 9952 7618 715 8223 38986 24445 117243 257420
M 1463 5334 13060 2509 381 8092 11802 34493 840 77974
B
S 2374 12248 3657 17712 1817 5137 59747 26125 16927 145744
M 372 855 252 1605 3453 820 7593 16428 1128 32506
C
S 631 10496 1492 5422 1694 11971 74855 16648 71860 195069
VA 37343 165382 40915 110666 24446 160467 - - - 539219
Tot 53005 257420 77974 145744 32506 195069 196072 128727 214420
CO2 emissions (in thousand tons)
277 914 395 1262 181 1726
Notes: A = Alberia; B = Botsonia; C = Crapstan; M = Man = Manufacturing; S = Serv = Services;
Final demand = Private and government consumption and investments; VA = Value added; Tot =
Total.

Note that the numbers in the table above are exactly the same as in the input-output
table in the previous exercise. For the current case, provide the questions that
correspond to the answers given in the previous exercise.