Using Ready-Made Regional Input-Output Models to Estimate Backward-Linkage Effects of Exogenous Output Shocks

The Leontief input-output model provides the basis for quantifying backward linked multiplier effects of exogenous final demand shocks. In certain situations, however, policies or uncontrollable factors induce exogenous changes in gross industry output. Application of the usual Leontief multipliers in these cases will lead to biased calculations of backward linked economy-wide effects. To eliminate this bias, an output-based adjustment method is proposed that relates demand-driven Leontief multipliers to exogenous output shocks. It is demonstrated that this approach yields exactly the same results as the mixed exogenous/endogenous variables technique, a commonly employed adaptation procedure that accepts outputs as entries. The equivalence between these two approaches is important, because the output-based approach offers substantial computational savings through ease of implementation within ready-made regional input-output systems and provides practitioners with the ability to generate disaggregated estimates of indirect multiplier effects.