Chapter 3
INPUT-OUTPUT TABLES AND REGIONAL INCOME ACCOUNTS


3.1 Introduction

This chapter presents the input-output table as an accounting system for an economy. Labeled "hypothetical", the numeric example is actually a 5-industry aggregation of the detailed table for Georgia in 1970 (Schaffer 1976). (Although out-of-date, it fits the style of most regional input- output tables in current use in the United States. It also fits the text, which is a slight revision of that used to explain the Georgia system.) First we look at the table as a whole; then we examine in more detail the quadrant of the table which reports the income and product accounts for this regional economy.

3.2 The regional transactions table

A regional input-output model traces the interactions of local industries with each other, with industries outside the region, and with final demand sectors. The central element in this model is a regional transactions table such as that shown in Table 3.. This table records transactions between five broad industries, three final-payments sectors, and three final-demand sectors. (The original presentation was of transactions between 50 industries, six final-payments sectors, and 6 final- demand sectors.)

Each row in this table accounts for the sales by the industry named at its left to the industries identified across the top of the table and to the final consumers listed in the right-hand section of the table. Intermediate goods are sold to local industries for use in producing other products while finished goods are sold to final consumers. Goods exported from the region to other parts of the nation and the world are listed under exports in the final-demand section, regardless of their stage of production. The sum of a row is the total output or total sales of an industry.


Table 3.1 Hypothetical interindustry transactions

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Thus, sales by the extraction industry (a combination of agricultural, forestry, fishing, and mining industries) are shown in row one of Table 3.1. Of the total output worth $1,674 million, over 35 percent is sold to light manufacturing (which processes it for further sale), and over 35 percent is sold outside the region. The remaining sales are largely to other industries within the broad extractive industry itself.

Each column in Table 3.1 records the purchases, or inputs, of the industry identified at the top of the column from the industries named at the left. Payments by the industry to employees, holders of capital, and governments are contained in the first two rows of the final-payments section of the table. These payments constitute the "value added" by the industry in question. Purchases from industries outside the region are identified in the last row of the final-payments section and are called "imports." These imports may be either of goods not produced at all in the region or of goods produced in quantities insufficient to meet local needs. The sum of the entries in each column represents the total purchases by the industry in question. Since profits, losses, depreciation, taxes, etc., are recorded in the table as final payments, the total purchases and payments must equal total sales. Inputs equal outputs; hence the term "input-output."

For example, the purchases and payments of the extractive industry are shown in column 1 of Table 3.1. Since this industry is almost 90 percent agriculture, the column reflects large intraindustry transactions (purchases of feeder stocks, baby chicks, grains, etc.), substantial purchases from light manufacturing (feeds), and a large payment to households for labor and proprietors' income. Local farmers also import from outside the state large amounts of feeds and other supplies. Notice that the total inputs is the same as the total outputs identified in row 1.


Figure 3.1 The transactions table as a picture of the economy

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Now, with this brief introduction to a regional transactions table, let us look at the table as an accounting system for an economy. Figure 3.1 shows an input-output table in skeleton form and divided into four quadrants. Quadrant I describes consumer behavior, identifying consumption patterns of households and such other local final users of goods as private investors and governments. Another important part of Quadrant I is the export column, which shows sales to other industries and consumers outside the regional economy. Since these goods would not normally reappear in the region in the same form, these sales are regarded as final. According to economic-base theory, in which final demand is the motivating force in an economy, we would look in this quadrant for activity-generating forces and we would especially examine the government and export sectors.

Quadrant II depicts production relationships in the economy, showing the ways that raw materials and intermediate goods are combined to produce outputs for sale to other industries and to ultimate consumers. This is the most important quadrant in an input-output table. For regions, it typically ranges in size between 30 and 500 industries. Quadrant II is the basis for the input-output model itself.

Quadrant III shows incomes of primary units of the economy, including the incomes of households, the depreciation and retained earnings of industries, and the taxes paid to various levels of government. These payments are also called value added; since they are so hard to identify individually, these incomes are frequently recorded as one value-added row. The quadrant also includes payments to industries outside the economy for materials and intermediate goods which are imported into the region. Since all of these payments to resource owners and to outsiders leave the industrial system of the region, they are called "final payments."

Quadrant IV identifies primarily nonmarket transfers between sectors of the economy and might properly be labeled the "social transfers" quadrant. Here we see gifts, savings, and taxes of households; we see the surpluses and deficits of governments and their payments to households and intergovernmental transfers. The quadrant also typically includes purchases by final-demand sectors from industries outside the region.

Now, to make a major point about the hazards of aggregation, let's look at the table as originally presented, as a picture of the Georgia economy in 1970. Out of a total output of over $34 billion, Georgia's manufacturing output in 1970 was valued at over $14 billion and its service output at over $11 billion, indicating that Georgia's economy was dominated by the manufacturing and service industries. Even so, Georgia was not a major manufacturing or service economy by national standards, as can be seen in the following comparison of the industrial origins of value added in Georgia and the United States (Schaffer 1976)

  Percent of value added
Sector Georgia U.S.
     
Agriculture, mining 4.2 5.2
Construction 4.4 5.6
Manufacturing 26.0 28.9
Transportation, utilities 7.7 8.1
Trade 18.3 14.6
Services 25.6 26.9
Government 13.7 10.7

Georgia had larger contributions to value added from trade and government than did the nation, and smaller contributions from the extractive industries, construction, manufacturing, utilities, and services. This deviation from the national pattern is an expression of the region's modest stage of development and its central position in the Southeast.

But this observation also shows that the "importance" of an industry is completely dependent on the definitions and aggregation patterns employed in constructing a table. By enlarging the table and altering sector definitions, we could change the apparent importance of industries. For example, by combining the agricultural industries with the food-processing industry (normally in manufacturing) we could make the "agriculture-based" industry larger than any of the components of the "trade" or "service" industries. In fact, in the 29-industry version (not shown here) of the Georgia table, the five largest industries in terms of output are: 1) trade, 2) finance, insurance and real estate, 3) services, 4) textile mill products, and 5) transportation equipment.

A second interesting item in Table 3.1 is the gross product of Georgia. Analogous in concept to the gross national product, gross regional product (GRP) can be defined as total production without duplication, or as the economic product of all factors of production residing in the region. It can also be seen as the total final payments (adjusted for imports) in the region, 20.459 billion dollars. Alternatively, it is also the total final demand by ultimate consumers of the region's products (net of imports).

In summary, an input-output table traces the paths by which incomes flow through the economy. Quadrant I is where the spending cycle begins and is where finished goods go to satisfy the needs of final consumers. Quadrant III is where the production cycle starts, with households and other resource owners, including governments, receiving payments for their contributions to the production process. Quadrant II traces production relationships, describing the technology of production in the economy. It outlines the market sector of the economy. Quadrant IV identifies nonmarket flows of money, showing purchases of labor inputs by governments, taxes paid by households, surpluses and deficits of governments, and transfers between governments and other governments and people.

3.3 Income and product accounts

The input-output table embodies not only measures of gross regional product but also a summary set of social, or income and product, accounts for the region. Like the input-output table itself, these accounts are part of a double-entry accounting system for the economy. In the same way that a businessman uses his accounts to develop a consolidated income statement for his firm, the economist uses income and product accounts to measure the performance of the economy and to compare the behavior of parts of the economy against other standards.

Table 3.2 is the transactions table rearranged to emphasize Quadrant IV, the sector in which social accounts are traced. This social-accounts table completely ignores the flows of intermediate products through the production quadrant and suppresses the details of the other quadrants. It emphasizes (1) the total final payments to resource owners for their contributions to production, (2) the aggregate demand for final products, and (3) the transfers which take place between primary units of the economy.

We have slightly rearranged the table. The row showing purchases from nonlocal industries (imports) has been moved above the final-payments rows. A row for transfers to households has been added to account for nonproductive money transfers to persons. And the one row for other payments in Table 0.1 has been expanded into four to show the details of final payments and transfers.

Six accounts are outlined in the table. The receipts side of the household account is shown in the household-income and household-transfers rows, which total to be personal income; the payments side is detailed in the household-expenditures column. The saving and investment account is shown in the capital-residual row (retained earnings, depreciation, savings) and the investment column. Local, state, and federal government accounts are shown in their rows and columns. And the rest-of-the-world account is shown in the row labeled "purchases from nonlocal industry" and the column "net exports." By placing these accounts into one matrix, we gain both economy in presentation and a feeling for their commonality.

Gross state product (GSP) may be measured in two ways, the incomes approach and the expenditures approach. Let us start with the expenditures approach.


Table 3.2 Income and product accounts for Georgia, 1970

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Using expenditures, we define GSP as state output at market value as measured through the expenditures of final consumers. This approach accounts for the final demand for Georgia's product by four groups of consumers: households, investors, governments, and private units outside the state economy. In Table 3.2, GSP is seen as total purchases of goods and services for final consumption, $20,459 million. In 1970, this was 2.1 percent of GNP. In comparison to expenditures for GNP, Georgia spent less of her gross product on personal consumption (59.0 percent in contrast to 62.9 percent for the nation), less on private investment (10.7, 13.5), and less on local and state government (11.3, 12.2); she made up for this in terms of federal defense expenditures (8.4, 7.5), other federal expenditures (5.0, 3.6), and net private exports (5.3, 0.4).

Using incomes, we can arrive at a similar GSP by adding the "income receipts" of the various accounts. The major receipt is earned household or personal income, which consists of wages and salaries, other labor income, proprietors' income, and property incomes. Including business transfer payments (primarily bad debts) and social security contributions, this amounts to $14,567 million, or 71.2 percent of GSP; the corresponding national figure is 75.2 percent. The "capital residual," or gross business saving, of processors is $3,019 million and comprises 14.8 percent of GSP, which corresponds to 9.4 percent in the nation. The capital-residual row of Table 3.2 includes two transfers worth noting: one is personal savings; the other is a negative entry of $1,688 million in the exports column. This "export" accounts for the surpluses and deficits of the various governments and the outside world. Much of it represents flows of retained earnings and capital consumption allowances to the nonresident owners of branch plants in Georgia.

The third receipt to be added to GSP is local government income from the processing sector. At $480 million, this figure accounted for 2.3 percent of GSP. The next largest income of local governments in Georgia was a set of intergovernmental transfers from the state government (much of which is offset by a similar transfer from the federal government to the state). The deficits of local governments are shown as an "export" (primarily bonds) worth $112.4 million.

The fourth receipt to be counted as part of GSP is state government income from the processing sector of $859 million. Combined state and local revenues from industrial sources are 6.5 percent of GSP, compared to 8.5 percent on the national level. Note that the state had a surplus in 1970 of $55 million, entered as a negative value in the exports column.

The final receipt to be included in GSP is federal government income from the processing sectors. Totaling $1,534 million, this income was 7.5 percent of GSP, compared with 6.9 percent on the national level. Notice that the federal government still spent $534 million more in Georgia than it received in taxes, accounted for largely through defense expenditures.

In sum, total receipts and payments by each of the six final sectors in the economy were $25,393 million. This figure is $4,934 million in excess of GSP. Where quadrant II shows intermediate transactions in the processing sector, the transfers quadrant records duplicative transactions in the social or political sector.

3.4 Summary

A state input-output table accounts for flows of monies through the state, showing details regarding consumer behavior, the technology of production, incomes, and social transfers. The transfers quadrant of a table can be slightly modified to show the details presented in the more traditional income and product accounts.

The social accounts are useful in two ways. One is in comparisons between economies; a brief contrast of the Georgia and U.S. economies has been sketched here and Georgia has been found to be strong in trade and government and slightly below the national pattern in manufacturing and services. The other way is in comparisons over time. But to show performance over time, social accounts and input-output tables must be constructed on a regular basis by state agencies.

3.5 Study questions

  1. Why should regional economic accounts be constructed?
  2. Define gross regional product.
  3. Construct a social accounting matrix like Table 0.2 for the standard economic base model of Chapter 2.<
  4. Contrast personal income and gross regional product as measures of a region's economic performance.

3.6 Appendix 1 CD-ROM data sources

One of the best sources of regional data is the Regional Economic Information System (REIS), produced by the Regional Economic Measurement Division of the Bureau of Economic Analysis.

Many Web sites have information from REIS available for downloading, but the most common source for the heavy user is the CD-ROM disk. Published annually in May, it contains data for states, regions, and counties from 1969 forward, with a two-year lag. (The May 1998 disk contains data from 1969 to 1996.)

For counties, the disk provides data on personal income and its sources, employment (in broad industry categories), an economic profile, transfer payments, and agricultural output. In addition it contains data on the journey to work between counties in 1970, 1980, and 1990, as well as annual estimates of gross commuter incomes.

For states, all of the above are available as well as estimates of Gross State Product for each state from 1977 to 1996. The following description comes from the "readme.doc" on the 1994 disk:

Current and constant-dollar estimates of gross state product(GSP) by industry for States and regions for 1990 and revised estimates for 1977-89 are presented. The 1987 Standard Industrial Classification (SIC) is incorporated, beginning with the estimates for 1987. Estimates for 1977-86 are on the 1972/77 SIC code. The current dollar estimates are published in the December 1993 Survey of Current Business and update and extend those published in the December 1991 Survey. The estimates for 1977-90 are consistent with the revised estimates of gross product by industry for the Nation that were published in the May 1993 Survey.

For a State, gross state product originating (GSPO) by industry is the contribution of each industry--including government-- to GSP. An industry's GSPO, often referred to as its "value added," is equal to its gross output (sales or receipts and other operating income, plus inventory change) minus its intermediate inputs (consumption of goods and services purchased from other industries or imported). GSP measured as the sum of GSPO in all industries is the State counterpart of the Nation's gross domestic product (GDP) by industry from the national income and product accounts (NIPA's). Estimates of constant-dollar GSPO are made using GDP by industry implicit price deflators.

BEA prepares GSPO estimates in 61-industry detail. For each industry, estimates of gross product is composed of four components (estimated in current-dollars only): (1) Compensation of employees; (2) proprietors' income with inventory valuation adjustment (IVA) and capital consumption allowances; (3) indirect business tax and nontax liability (IBT); and (4) other, mainly capital related, charges. Most of the compensation and proprietors' income components of GSP are primarily based on BEA's estimates of earnings by place of work, an aggregate in the State personal income series. The IBT component of GSP reflects liabilities charged to business expense, most of which are sales and property taxes levied by State and local governments. The capital charges component of GSP comprises corporate profits with IVA, corporate capital consumption allowances, business transfer payments, net interest, rental income of persons, and subsidies less current surplus of government enterprises.

For Georgia, the disk yields the following data for 1990:

Value
Item (in $ billion)
Gross state product 136.875
Indirect business taxes 10.061
Compensation of employees 83.861
Proprietor's income 11.405
Current capital charges 31.547

With budget reductions, the 1998 disk yields the following abbreviated data:



Value
Item (in $ billion)
Gross state product 183.042
Indirect business taxes 13.951
Compensation of employees 107.959
Other GSP 61.132

3.7 Appendix 2 Measures of regional welfare

3.7.1 The problem with GSP estimates

Gross state product accounts have been established for a number of states and using a variety of methods. In Hawaii, with a long history of independence, accounts have been constructed along exactly the same lines as a nation (in fact, some of the people involved in these accounts were close associates of members of the accounts team in the U.S. Bureau of the Census.

In most other states, however, the method has been a short-cut method known as the Kendricks- Jaycox method and involves estimates based on ratios.

The estimates of Gross State Product described in Appendix 1 have been assembled from all sources available to the Regional Economic Measurement Division. One nice thing about this central source is that the accounts for the 50 states are consistent with the accounts for the nation as a whole.

The following statement shows the formal difference between "Gross Regional Product" (GRP) and "Gross Domestic Regional Product," (GDRP) which parallels the difference between GNP and GDP. This equation shows development of GRP as GDRP adjusted for net factor payments (including profits).

GROSS DOMESTIC REGIONAL PRODUCT
  LESS INTEREST AND DIVIDENDS TO NONRESIDENTS
  PLUS INTEREST AND DIVIDENDS FROM REST OF WORLD
  LESS WAGES EARNED BY IN-COMMUTERS
  PLUS WAGES EARNED BY OUT-COMMUTERS
  EQUALS GROSS REGIONAL PRODUCT

GROSS REGIONAL PRODUCT is the total value of goods and services produced by factors of production owned by residents of the region; GROSS DOMESTIC REGIONAL PRODUCT is the total value of production in the region.

In the United States, GNP is greater than GDP -- we own more abroad than others do here. In Hawaii, GRP is less that GDRP -- natives own less abroad than others own in Hawaii. In other states, the question has not been answered.

The point of this is that, since people always confuse lengthy titles, we just go ahead and confuse things to begin with and rename gross domestic state product as gross state product!

GSP = GDSP

3.7.2 The widespread use of personal income estimates

The problems associated with estimating flows of capital income from one area to another are severe. We just can't develop accurate statistics on ownership of large multi-state and multi-national corporations and thus on the flows of dividends and interest across state boundaries.

As a result of this handicap, we normally consider personal income as a better measure of individual welfare. Considerable data on journey to work and commuting across county boundaries over the last three decennial censuses has permitted the Regional Economic Measurement Division to estimate adjustments for residency, which solves part of the GRP/GDRP problem.


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