New Model of the Interaction between Industries and Households (A)
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Closed input-output models incorporate household consumption in 2 ways, (a) by including the consumption vector in the input coefficients matrix and/or (b) by including some of the consumption coefficients in the input matrix and including the consumption-income relationship of others in the final demand vector. In this paper we propose a model in which household consumption demand is kept entirely outside the input matrix. In effect households are neither wholly nor even partially treated as industries so that all interactions between industries and households can only take the form of independent market forces of demand and supply; the forces of demand being conditioned by consumer habits, conventions, tastes and preferences and the forces of supply, by technology and profits. It is then shown that this model can fruitfully be extended/applied to the analysis of public goods provision by government and to the subject of international trade. The paper is divided into seven sections. The basic model is presented in the second section which shows the existence of an economically meaningful equilibrium solution. The market processes by which the economy effects the transition from disequilibrium to equilibrium is spelt out in the third section. The fourth section incorporates public goods in the basic model. The fifth section presents an application of the model to the theory of international trade in both intermediate capital and consumption goods, and the sixth section sums up the conclusions.
- GIPE Working Papers