Preferences, Technology, Trade and Real Income Changes in the European Union : An Intercountry Decomposition Analysis for 1975-1985

This paper refines, develops and applies input-output decomposition analysis: first, by putting it in an unique intercountry perspective; second, by concentrating on explaining income growth; and third, by systematically separating the effects of trade pattern changes from the effects of technology and preference changes. The resulting matrix decomposition formula distinguishes six components and is applied to a set of EU-intercountry input-output tables in constant prices, with 25 sectors and 6 EU-countries, for 1975 and 1985. Macroeconomic demand growth is found to be the most important component at the aggregate country level. The other five components relate to the impacts of coefficient changes. Their sizes are smaller, but at the sector level they are quite large and different between individual sectors and countries. It is concluded that the analysis uncovers a much broader potential impact for national and EU industrial policy measures than the usual less refined decomposition analyses