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Lecture Notes
in Economics and
Mathematical Systems
Managing Editors: M. Beckmann and H. P. Kunzi
Mathematical Economics
116
K. Miyazawa
Springer-Verlag
Berlin Heidelberg New York 1976
Editorial Board
H. Albach' A. V. Balakrishnan' M. Beckmann (Managing Editor)
P. Dhrymes . J. Green . W. Hildenbrand . W. Krelle
H. P. KUnzi (Managing Editor) . K. Ritter' R. Sato . H. Schelbert
P. Schonfeld
Managing Editors
Prof. Dr. M. Beckmann
Brown University
Providence, RI 02912/USA
Author
Dr.. Kenichi Miyazawa
Hitotsubashi University
Kunitachi,
Tokyo, 1861Japan
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or Congress Cataloging
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HB142.M59
339.2
76-000006
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5.
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by Springer-Verlag Berlin' Heidelberg 1976
FOREWORD
The purpose of this study is in keeping with the shift in concern over the economic problems of growth to those of income distribution in recent years.
Income
distribution problems may be analyzed by not only the traditional procedures, but
also by some extensions of the input-output technique as I shall demonstrate in this
volume of the Lecture Notes.
input-output analysis and (2) Parts One and Three contain studies of the effects of
the structure of income distribution on some other economic relationships.
First, as an extension of the input-output analysis, we present a synthesis of
the Leontief interindustry matrix multiplier and the Keynesian income multiplier in
disaggregated form, and introduce a new concept which may be called the "Interrelational Income Multiplier" as a matrix.
ships among various income-groups in the process of income formation through the
medium of industrial production activity.
inverse provides us with knowledge of only the ultimate total effects of interindustry propagation and not the disjoined effects separable into the partial multipliers,
as such, our method may well be applied to the various kinds of problems that require us to trace back to the interactions among two or more strategic industry
groups.
Finally, some empirical applications of these two models are introduced, deal-
IV
ing with several cases from the Japanese economy and with an international comparison
of the interdependence between service and goods-producing sectors.
The empirical
illustrations also include the applications of an interregional version of the inputoutput model in the extended forms.
The other theme of this volume deals with the structure of income distribution.
In this context, we employ two methods of entirely different nature.
The first is an application of the above mentioned interrelational income multiplier model, by which we clarify the effects of income-distribution-factors on the
income determination process.
input-output open model, the same amount of autonomous expenditures cannot have varying effects on the level of national income even if the expenditures consist of different commodity proportions.
It will
be shown that in order to have the value of income vary in conjunction with the commodity proportions of demand, it is not sufficient to introduce the structure of
income distribution by types of income-group alone, but we must introduce at the
same time the distribution-factors by the types of industrial value-added for the
production structure also.
The second study is a differentials-analysis especially of wages and interests
as rewards to the factors of production.
Sato who read through the original manuscript with constructive criticisms and who
v
recommended this volume for publication in this Series.
acknowledges Gilbert Suzawa for correcting and improving the English content of the
original manuscript.
noted in the footnotes to each chapter, for permission to reproduce the original
articles in various revised form.
Tokyo,
August 1975
Kenichi Miyazawa
Introduction ........................................................ .
II.
III.
2)
3)
Introduction ......................................................... 22
II.
III.
IV.
V.
VIII
Introduction ......................................................... 43
The Foreign Trade Multiplier and the Circular Flow of Intermediate
Products ............................................................. 44
III.
IV.
V.
VI.
Formula for the Computation of the Subjoined Inverse showing the Effect
of Endogenous Changes in Consumption ................................. 55
1)
2)
Propagation
PI~cess
Keynesian Multiplier
PART TWO:
CHAPTER 4 INTERNAL AND EXTERNAL MATRIX MULTIPLIERS IN THE INPUT-OUTPUT MODEL .... 59
I.
Introduction ......................................................... 59
II.
III.
IV.
2)
Introduction ......................................................... 76
II.
III.
IX
2)
IV.
PART THREE:
CHAPTER 6 THE DUAL STRUCTURE OF THE JAPANESE ECONOMY AND ITS GROWTH PATTERN
I.
II.
III.
1)
2)
3)
2)
3)
IV.
V.
2)
PART ONE
INPUT-OUTPUT AND INCOME FORMATION
CHAPTER 1
INTERINDUSTRY ANALYSIS AND THE STRUCTURE OF INCOME DISTRIBUTION*
I.
rntnoductio~
e~0genouo
variable in
the Leontief system, the household sector is routinely transferred to the processing
sectors, and is regarded as an industry whose output is labor and whose inputs are
consumption goods.
matrix multiplier which combines Leontief's propagation process with the Keynesian
propagation process in the form of the Leontief inverse multiplied by a
~nv~e
matnix.
~ubjo~~ed
consumption demand. l )
Nevertheless, this extension of the standard Leontief model may not adequately
deal with the interrelation between the interindustry and consumption structures.
The reason for this is' that the consumption structure generally depends on the
structure of income-distribution. The income-distribution structure regulates the
consumption pattern in that the consumption pattern consists of the expenditure behavior of various income-groups.
* This is a revised and integrated version of two articles which are originally
published, under the same title, in M~oeco~o~ca, Vol.15 Fas. 2-3, AgostoDicembre 1963 (with collaboration of Shingo Masegi), and in the theoretical part
of "Input-Output Analysis and Interrelational Income Multiplier as a Matrix,"
H~othub~hi JOUA~at 06 Econo~~, Vol.8, No.2, Feb. 1968.
1) K. Miyazawa [32J, especially Section IV and VI. See Chapter 3 in this volume.
II.
06 National. Inc.ome
At the outset, in order to delineate the salient aspects our problem, we will
give a brief macro-numerical example of the model to be developed later.
In the
total
I
I
I
30
W 6
---------p 4
total X
40
I
I
I
I
I
I
I
2 40
1
=~
f- = 1 _1 3/4 . 10 = 40. This is a macrocosmic
wage W + profit
p =
= 1 _ 18/10 . 2 = 10.
Thus by combining the simple Keynesian income multiplier with the simple Leontief
output multiplier, we obtain the following output solution for an input-output model
with endogenous consumption demand: 3)
1
1
1 fX=r:a
=r:-a'~'
I.
(i)
= w/y and
Let d l
d2
= Gw/W and
a2
laborers and capitalists, respectively, then we have the generalized Kalecki income
multiplier
~ =1
(ald~
= y/x = 1
If we let v
= w/X,
v2
= p/x
This equation (iii) is the macro-counterpart of the matrix multiplier which we will
develop next.
2)
GenVta..Uza;tion 06
the
Inpu.t-Ou.tpu.t Model
The value-added sector in the interindustry model is not only divided into n
industry-groups along the column, but is also divided into r income-groups along the
row, as our simple macro-numerical example illustrates.
of the kth group earned from the jth industry as Ykj (j
4) If we let al
1,0
<
a2
<
= 1,
... , n ; k
1
(1 _ dl)(l _ ( ) as a special case of this expression.
2
_-,--'-1-.----,------;-,
1/2, then we have Y = T
- (ald l + a 2d 2 )
-- 1
- 1/2
= 1,
(6/10 + 1/2.4/10) 2
2 = 10.
... , r);
If we let a l
1
= 1,
a2
10 or
is also defined as consumption for the ith commodity by the kth income-group (i = 1,
... , n ; k = 1, ... , r).
Fi gure 1
A =
= x .. Ix.,
1.-J J
V =
the
= Yk
C =
the n x
1.-J
Ix.,
a ..
1.-J
Let
1, 2, ... , n
=1,2, ... , r
(n > r)
x = AX + fa + f
(1 . 1 )
gard the household sector as a distinct decision-making unit instead of as a fictitious production unit, the introduction of a disaggregated consumption function is
necessary.
The consumption function of our model can be written as follows:
k=l
1.-
J J
(1 .3)
where
(k) _ (
(k)
- 0lk' 02k' ... , nk) , is a column vector and v
= (v kl ' v k2 ' ... , v kn )
is a row vector.
sumption function, C becomes the matrix of marginal coefficients, and in this case we
can include the nonhomogenous terms in f. 5 ) Substituting the consumption function
(1.3) into (1.1), we get
(1 .4)
X=AX+CVX+f
= [I
- A - CV]-lf
= B[I
- CVBr If
=B[I
+ CKVB]f
(i)
(i i)
(1. 5)
(i ii)
~ged inv~e
matnix multi-
showing the total effects of exogenous final demand on outputs via interindus-
try and induced consumption activities. The existence of the inverse [I - A - cv]-l
is generally verified.
- A - cv] -1
= B[I
We can refer to the inverse
(1 .6)
- CVBr l
[I - CVB]-l
This in-
5) If we define some o(k), which is the capitalist group's coefficient, as <propensity to consume ptu6 propensity to invest>, our model formally contains the problem of induced investment.
The development of
such a practical computation formula is also useful from the standpoint of understanding the theoretical aspects of inter-income group activity.
a task.
Let us write
k=l, ... , r
v=l, ... ,r.
Then, as we shall show, we can prove that:
B[I -
CVBr 1
= B[I
(1.7)
+ CXVB].
The third expression (iii) in (1.5) means that the n x n subjoined inverse
[I - cv.s]-l can be obtained, without inversing the matrix, by the means of using the
~~etational
income
muttipli~
X whose order is r x r.
=I
X[I - VBC]
then
CX[I - VBC]VB
'"
= CVB
= [I
=I
- CVB
CXVB][I - CVB]
:. [I - CVBr l
=I
+ CKVB,
where identity matrices I's in the first and second equations have the order of
6) If we set r = 1 in (1.6), i.e., if we do not make a distinction among the incomegroups, the equation (1.6) coincides with the formula which we have derived elsewhere (see [32] p. 63 or (3.20) in Chap. 3), and it corresponds perfectly to the
macro-multiplier (i) in Section 1).
7
l' X 1',
and those in the third and subsequent equations have the order of n x n
respectively.
the
l'
l'
l'
the numerical table for B, we can renew the subjoined inverse whenever it is necessary to do so.7)
3)
We may also work out the proof of formula (iii) in (1.5) by the method which
traces the propagation process initiated by the original injections.
This method
may, at the same time, reveal the economic meaning of matrices Land K.
Denoting by m the numerical stage of the propagation process, we get
(m 1; 2)
(1.8)
Hence,
(1. 9)
Thus,
x=
m=l m
= B[I
= Bf
+ BC(
Lm- 2 )VBf.
m=2
(1.10)
m=2
+ C(I - L)-lVB]f
= B[I + CKVB]f.
(loll)
= VBC
7) Our model can be easily extended to accomodate an open economy with foreign trade.
8) The convergence conditions of our model will be examined in Section IV.
point, we take the vth income group as representative and trace its consumption expenditure effect on another kth income group's income.
increase in output
of each industry
->
increase in income
->
->
increase in consumption
->
That is, the coefficient Zkv shows how much income of the kth'income-group is generated by the expenditure from 1 unit of additional income of the vth income-group.
Thus we can term L the "matrix of inter-income-group coefficients", and K "the
interrelational multiplier of income groups".
A proposition arises in connection with the matrix of inter-income-group coefficients:
where
i~
= i'VBC
= i'[I
- A]BC = i'C
I'
n
n'
III.
The. Re1.a.UonolUp
(1.13)
I'
respectively.
06 In.:teJt-Income.-GJtouP.6 and
1)
a6
a. Ma.tJvi.x
As before,
denoting by Y the column vector of r order whose elements are household incomes by
income-groups, we get
(1.14)
Y = VX.
substituting formula (iii) of (1.5) into this expression (1.14), the income equation
becomes
Y = VB[I + CXVB]f
[I + VECX]VEf
(1.15)
[I + LX]VBf,
in which r + LX
= X because [r -
L]K
= I, so we obtain
(1.16)
Y = KVBf.
= VBf
(1.17)
m-1
=L
Y{l)'
for m
Y =
=
m~,r (m)
= Y (1)
[r + L + L
3
+ L + ... ]Y (1 ) .
(1.18)
= [I
- L]-l VEf
(1.19)
= KVBf
on
muLU-~ec.:toJt
..[nc.ome muLUpUeJl. in
..[nc.ome noJtma.t..[on.
10
following composition:
VB. 9 )
post-multiplied by
the direct and indirect induced incomes of each income-group attributable to the
initial autonomous demand. 10 )
This multi-sector income multiplier is a distinguishing feature of our model.
In the conventional input-output analysis, where consumption demand is entirely
exogenous, the outputs of various industries have different values depending on the
proportions of final demand;
come has the same value as final demand and does not depend on the proportions of
final demand.
income and group incomes) have different values depending on the proportions of final
demand, and this is due to the fact that our model takes explicitly into account the
structure of income distribution.
2)
eMU
This conclusion cannot be obtained by the introduction of an endogenous consumption structure without some explicit consideration of the distribution-pattern.
The
be-
respectively, and assume that all value-added in the national economy consists of
the income accruing to the household sector,ll) then
9) An alternative justification for formula (1.19) was suggested by W. H. Branson
[4] at the Econometric Society Meetings, Washington D.C., 1967. Income generated by exogenous expenditure is equal to VBf, and income generated through
endogenous demand as a function of income is equal to VBCY, thus income Y is
given by Y = VBCY + VBf = [I - VBCr 1VBf.
10) To combine the income-effect in our model with the relative price-effect, we may
be utilized R. Stone's "linear expenditure system". See [50], [52].
11) With this assumption, v' becomes the vector of value-added ratios for the whole
economy, and in an economy with no foreign trade and government activities, the
conversion v' = i'[I - A] becomes possible. Then we get
v'B = i'[I - A][I - A]-l = i'I = i'.
Of course, if the household sector accounts for only one part of the value-added
sectors in the national economy, this conclusion must be modified.
11
(1. 20)
1 - 0
comes
Y = KVBf
(1.21 )
Thus our conclusion that income has different values depending on the proportions of
exogenous demand is not substantiated in the special Keynesian case. 12 )
(b)
economic form as in the Kalecki or Kaldor models, the above Keynesian result is not
improved.
Denoting by
where e' = i'C is the row vector of k order whose elements are the total propensities
to consume of each income-group. Then, we get Lm = (de,)m = d(e'd)m-l e , = dim-le',
where i is a scalar showing the weighted average of propensities to consume of each
income-group. Thus, the interrelational income multiplier in this case is
K
= [I =I
L]-l
=I
I i m- 1de' =
m=l
I Lm
m=l
I + _1_ de' ,
1- i
(1 .22)
12
and the fundamental equation takes the form:
Y
= KVBf
+ _1__ de'] dv'Bf = [I + _1__ de'] di'f = [d +
= [I
1-1.
1-1.
1-1.
(1. 23)
= _l-df.
1 -
~d]fO
In which case, the autonomous demand vector f becomes a scalar fO' and the equation
(1.23) coincides with the Kalecki multiplier, except when it is expressed in some
generalized form.
all that is required is to multiply both sides of the equation by summation vector
i', i.e.,
i'Y
= i,_l_ df = i'd-ll-i
l-i
= _1_ f
l_i
(1. 24)
If we assume the constancy of relative shares, the scalar 'i always takes a constant
value, and, after all, equation (1.24) ends up being formally equivalent to the
Keynesian multiplier (1.21).
(c)
customary
(f
Y
(1. 25)
and income equals final demand irrespective of the proportions of final demand.
Thus, in order to conclude that the values of income differ depending on the
proportions of autonomous final demand, it is necessary to introduce not only the
structure of consumption demand, but also the structure of income distribution.
3)
Sbw.c.twr.e 06
If we lump together the above two mechanisms of output and income determination,
we have the following system:
~]
[*J [~]
~].
(1. 26)
13
and it is expected that this solution can be converted to the form:
(1.27)
where g is a column vector of exogenous income. 14 ) The preceding separate solutions
(1.5) and (1.16) are equivalent to (1.27) where g is disregarded.
Now, let us return to the output propagation equation (1.10).
Equation (1.10)
can be interpreted as the propagation process viewed from the income-formation side.
But the same propagation process can also be observed from the consumption side or
the production side as well.
(a)
= Bf
=
(b)
= L)
Bf + BC[I - L]-lVBf
(1 .28)
= B[I
(1. 29)
(1. 30)
[I + BC(I - L)-lV]Bf.
It is interesting to note that in all cases, we can obtain the computation formula (1.7) by projecting the propagation process into the income-formation side
VBC.
On the other hand, if we derive the sum of the geometrical progression from the
consumption side (CVB) or the production side (BCV), we do not obtain the computation
formula (1.7) directly, but instead obtain the equation (1.6) which is the product of
two inverse matrices.
14) The proof of (1.27) is easily demonstrable by use of the following identity:
WQ]
iPrI '
14
character which contrasts strikingly with the nonhomogeneous character of both production and consumption activities.
One other point regarding the propagation process should be explained.
tions (1.28)
Equa-
production side is represented entirely by the effect of matrix B, and in the next
step, the propagation occurs on the income-formation and consumption expenditure
sides.
But instead of this assumption, we may assume that propagation occurs simul-
In the
rewritten as follows:
x =f
We write
A +
(A
CV)f
(A
Cv)2f +
(1.31 )
00
L~
m=O
to be convergent, we have
(l .32)
= B[I
- CVB]-lf
= B[I
CKVBJf.
~ncated
(1.30) has generally a larger value than the truncated multiplier in the
case of (1.31).
two cases.
IV.
= AX
(I - Q) -1
+ CVX +
~
f, (f
0, for our
1.
0 and of K = (
I - L)
lems and their relationships, we will first review the properties of the Leontieftype matrices as preparation for developing the convergence conditions of our model.
15
1)
For non-negative square matrices in general, the following properties are well
known:
[I] Let a be a n x n non-negative matrix.
(1 0)
L am
m=O
converges
(2)
(3)
(4)
= f has a
(I -
a)x
nonsingular.
Lemma 1.
Let a be Leontief-type.
L am
m=O
nonsingular.
Now, we may transform a into the form (1.33) below by some permutation matrix
(1 .33)
A2 . A2k
o
where Al , A2 , ... , Ak are indecomposable square submatrices, and k
>
2 or k
=1
16
[III] Let a be Leontief-type.
any non-negative
vecto~
t,
=t
ha6 a non-negative
6o~
~o~on
is that at least one of the column sums be less than 1 for some column in each
submatrices Al , A2 , ... , Ak in (1.33).
Based on [I], another form of [III] is obtained by replacing the paragraph
italicized in [III] with "all characteristic roots of a be less than 1" in absolute
value, which we call [III'].
Solow's Theorem asserts that condition [III'] is a sufficient one. 17 )
We can also show that it is necessary too. 18 )
A different form of [III] or [III'], more convenient for our purpose, is
Lemma 2. 19)
Let a be Leontief-type.
00
(1)
(2)
L am
m=Q
converges.
00
L am
m=Q
diverges.
Suppose that
17
(3)
L am
~(l)
A(l2) ]
A(2)
are equal to 1.
(1. 34)
The assertions (1) and (2) in this proposition have nothing to do with the
And as for (3), it is the particular and not the general
decomposability of a.
indecomposable and the case where a is decomposable, but not into the form (1.34).
Now, let us return to our model.
l'
L a.. + Lvk
i=l
k=l
1.-J
l'
Lv
k=l kJ
>
0 or
>
LVkj
j=l
=1
n
La1.-J..
i=l
<
(j
1, 2, ... , n)
(j
1, 2, ... , n)
(k
1, 2, 00 ., 1')
[p4]
(A generaliza-
l'
l'
00)
l'
L Zkv =aV
k=l
As
(v
1,2,00',1')
l'
and n x n,
18
(2)
i=l
q .. = 1
1-J
Co~o~y.
2)
Convengenee
Con~On6 ~n ~he
Model
We can now consider the convergence properties of the propagation process in our
model.
= jn. Thus,
+L
Ign
'"
I~.
m=O
is also Leontief-type.
Lemma 1,
'" m
I L coincides with that of
The convergency of
Theo~em 1.
m=O
Since I + R .. + ~ = I + C(I + L +
-m
IEm
and that
of I~
are equivalent.
I - R
f 0 and
Next, from
I - Q
f 0,
respectively.
And, since I where always
I - A
= I - A - CV = (I - CVB) (I - A),
f O.
Hence
I - Q
f 0 and
I - Q
I - R
I - R
I I
I - A
I,
f 0 are equivalent.
This means that I~ converges if and only if I~ converges, and therefore if and only
if
ILm converges.
A simultaneous permutation of rows and columns in A, reflecting a change in the
order of industry groups, induces a permutation of the columns in V and that of the
rows in C.
2.
Let ak =
i=l
(k
a. k
1, ... , X')
1-
If all a l , ... ,
aX'
19
1,
LQF
(2)
If 01 = ...
(3)
converges if and only if A, V and C are not decomposable by any 11- and
c=
(1.35 )
V=
where 0
<
Proof.
<
n, 0
< 8 < P,
L q ..
i= 1 1.J
(k
(1)
ok
L q1.J.
i=l
= 1.
L q .
i=l
1.J
<
<
1 (k = 1, ... , p):
= 1,
= 1 if and only if
... , p)
(i )
LQF
Hence,
LQF
n~
Therefore
LQF
converges, from Lemma. 2. (3), if and only if Q is not decomposable by any I-permutation of A, V and C, into the following form:
20
<
<
(i i)
n.
We shall prove that Q is decomposable into (ii) if and only if A, V and Care
decomposable into the respective forms represented in (1.35).
Let Q be decomposed into (ii).
Q, we may take
(i i i)
(O<t<1')
(k = t + 1, ... , 1';
= 0
(i = h + 1, ... , n;
l'
L c.kv k .
k=l
(i v)
j = 1, ... , h)
'I-
=0
1, ... , h).
=0
(i = h + 1 ,
... ,
n;
= 1,
. .. ,
cikvkj = 0
(i = h + 1 ,
... ,
n;
= 1,
... , h;
a .
'l-J
(v)
h)
k = 1,
... , 1')
(vi)
Jk
>
0, for k
= 1,
obtai n
=0
V kj
Here 0
< B ~
<
(k = B + 1 ,
... ,
cik = 0
(i = h + 1 ,
t;
= 1,
... ,
h)
(vi) ,
... , n;
= 1,
... ,
B)
(vi i )
The last II-permutation changes the order of columns in c, but only among the
first
columns.
And, as
is unchanged, so is (v).
From (iv), (iv'), (v) and (vii), we conclude that A, V and C are decomposable into
the forms depicted in (1.35).
The converse is obvious, and the proof is completed.
21
The condition in (3) of this theorem contains the following two cases:
(a)
is indecomposable, (b)
and C simultaneously.
As a consequence we have
Corollary 1.
In the case where some c l ' ... , cr are equal to 1 and some less
than 1, L~ comverges if
is indecomposable.
ConoLt~y
1, where
n = 1, r = 2.
3.
0, the
La .. + L V k
i=l 7-J
k=l
~ 1.
(1) in Theonem 2
20) One case represented by assumption [pl '] is an open economy with foreign trade.
As shown in Section III, in the case of a cio~ed economy with no foreign trade,
the conclusion that income has different values depending on the proportion of
final demand can be derived only by introducing the structure of income distribution. But in the case of an open economy with foreign trade the same conclusion can be derived without introducing the distribution structure, because the
coefficients on the production side enter into the income-formation process
through imports. For the open economy model, refer to Chapter 3.
CHAPTER 2
INPUT-OUTPUT ANALYSIS AND INTERRELATIONAL INCOME MULTIPLIER AS A MATRIX*
I.
rntnoduction
income-groups in the process of income formation, and in this respect it tells us how
much of one group's income is generated by another group's expenditure from one unit
of additional income via the medium of industrial production activity.
Although this
23
the level of income and its use do not depend on the composition of production. l ) In
the real world. however. autonomous expenditures of equal amount. but having different commodity compositions. appear to have different effects on income formation.
In
order to have an input-output model in which the value of income differs depending on
the proportions of autonomous demand. it is necessary to introduce not only endogenous consumption in disaggregated form. but also the structure of income distribution
by the type of income-group as well as by the tupe of industrial value-added.
This
II.
Our
[{jJ ...
a~~
1.-J
= 1. 2
1) This is true in the case of a closed economy with no foreign trade and government
activities. But in the case of an open economy with foreign trade and government
activities, the same conclusion does not hold, because the composition of production plays a part in the income formation process through imports, subsidies and
taxes.
.
24
[y~SJ
J
in each region.
the income of a household in region r earned from 1 unit of
v~S
J
(j
1,2, ... ,
n;
ci
r1=
B = [I - A
[b~~J,
1.-J
(2.1)
the corresponding earnings by the household sectors in each region are easily determined as follows:
VB=
\' rs sr]
.. ,
~ lv.b
,s
(2.2)
J1.-
which forms the k x nk matrix of coefficients showing induced income earned from
production activities among industries and regions.
production due to endogenoU4 consumption per 1 unit of income in each region's household sector is given as the following nk x k matrix:
Be =
rLz:,rI b~~Cx:sJ.
(2.3)
J1.- 1.-
(2.4)
2) Instead of this definition, if we denote byeS the total propensity to consume in
region s, and by h~s the consumption-allocation coefficients for the ith commodi1.-
= cX:1.- s
25
since the multiplication of rectangular and square matrices V, Band C makes a new
k x k square matrix whose order is equal to the number of regions.
This square
matrix L may be interpreted as an array of coefficinets which shows the interrelationships among incomes of various regions through the process of propagation from
consumption expenditure in each region.
cussion process naturally leads to the intersectoral income multiplier among regions
of the following type:
K
The matrix
[I - L
r 1 = [krsJ.
(2. 5 )
This matrix shows the direct and indirect income-generaged per unit of income regionally originated, where, of course,
k x k.
Denote by X a column vector of nk order whose elements are output of n industries in each region, and by Y a column vector of k order whose elements are incomes
of the household sector in k regions.
order of final demand other than endogenous consumption expenditure, and g stands
for a column vector having k order of exogenous income. Then we have the following
system:
(2.6)
(2.7)
26
III.
The
Int~elational
Income
Muttipti~
among
Reg~on4
For analyti-
cal purposes, the original data tabulated in 9 blocks and 25 industrial sectors was
aggregated into three regions and 25 sectors.
other calculations for our model were done under the cooperation of the MITI-staff,
together with some other calculations for general or conventional studies. 3)
The logic of separating the Japanese economy into three regions, namely, the
Northeast, Middle and West, is based mainly on our desire to study the interrelationships between the advanced and backward areas in Japan. 4 ) Of these three regions,
the Northeast and West are relatively backward, and the Middle is the advanced area
in Japan.
The major industries are concentrated in the Middle, except for special-
ized regional sectors which exist because of resource endowments and other reasons.
Table 1 is the interrelational income multiplier for the three-region model.
The equations used here have been given in (2.4) and (2.5), i.e., K = [I - LJ- l =
[I - VBCJ- l , where the orders of matrices V, Band C in this case are 3 x 75,75 x 75
and 75 x 3 respectively.
endogenous.
Thus, the elements of V are not the value-added ratios for the economy
as a whole, but merely that of the household sector with the fraction corresponding
to the retained income of the business sector excluded.
3) See, Ministry of International Trade and Industry [24J. The details on dataarrangements for application of our model are shown in Chapter 2 of the Supplement Part of this report.
4) The Northeast is defined to include Hokkaido and Tohoku, the Middle includes
Kanto, Chubu and Kinki, and the West consists of Chugoku, Shikoku and Kyushu. The
manner in which Japan is divided into these blocks is based on the Regional Bureaus of MITI for the convenience of collecting regional data. Therefore, aggregation into three regions, consistent with economic areas, is somewhat restricted
by this base.
27
the coefficient matrices V and C are given in the Appendix tables in summary form. 5)
TABLE 1
INTERRELATIONAL INCOME MULTIPLIER FOR THE THREE-REGION MODEL
K = [I - VBCr 1
region
inco~e.
of income orlgln
receipt
Northeast
Middle
West
Total
Northeast
1.55
0.07
0.04
1.66
Middle
0.32
1.57
0.29
2.18
West
0.06
0.07
1.60
1.73
1.93
1.71
1.93
5.57
Total
rise directly and indirectly to 1.55 units of income in the Northeast itself, 0.32
units in the Miadle, 0.06 units in the West, and, in total, 1.93 units for the
national economy as a whole through the medium of expenditure and production
activities.
Let us now compare the column totals in the last line of the Table. These
5) We divide the consumption demand of the household sector into endogenous and
exogenous items, and only the former is included in the multiplier side. The ex~
ogenous household consumption included in the multiplicand side consists of the
expenditure from the transfer income from government, and its propensity to
consume is assumed equal to one.
With regards to thousehold income, we take the compensation of employees, wage
income of unincorporated enterprises and income from properties as endogenous
items,while the retirement allowance in the private sectors and transfer income
from government are treated as exogenous elements. The estimations of income and
its allocation among regions and sectors are mainly based on the income statistics
and input-output data.
28
values show the induced effects of each region's income on the household incomes of
the national economy as a whole.
Middle, 1.71, takes a slightly lower value than those for the Northeast and West
(both equal to 1.93).
However,
o~gin~ng
from
each region, the values of row totals on the right hand side of the Table show the
induced effects
~eceived
amounting to 2.18, while the Northeast and West receive effects amounting to only
1.66 and 1.73 respectively.
As shown in the column elements of the Middle area, the induced effects of the
Middle on each region appear intensively in the Middle itself, which takes a value
of 1.57, and appear only negligibly in the Northeast and West, where the values are
identically equal to 0.07.
the West on the Middle take the relatively high values of 0.32 and 0.29 respectively.
That is to say, there is a considerably tendency for induced income to flow from the
backward areas to the advanced area.
The main reasons for this tendency are that:
29
coeffi~
cients for the Northeastern and Western commodities, and (3) as shown by the
coefficient values of matrix V presented in Table a of the Appendix, the ratios of
income-flow-out into the Middle from the Northeast and West are relatively higher
than those of the opposite directions.
the process of propagation account for the concentration of income in the advanced
area.
IV.
Campa~~on
Income-V~tkibutlon
The analyses in the preceding section have focused on the induced effects of a
unit of regional income, and have ignored the implications of the structure, or
commodity composition, of each region's autonomous demand.
In order to closely
examine this aspect, we have to shift our attention to the equation Y = KVBf.
We shall inquire into the problems of composition in two different ways.
In the
fundamental equation of income formation Y = KVBf, (i) let us replace the autonomous
demand vector f by the matrix Fl which shows autonomous expenditures separated into
three regional demands, and (ii) replace the vector f by the matrix F2 showing
autonomous expenditures separated into demand categories such as investment,
government expenditure and export, etc.
(2.8)
where, because the autonomous demand matrices Fl and F2 have the orders of nk x k
and nk x m respectively (m is the number of demand categories), the income Yl and Y2
become matrices having the orders of k x k and k x m respectively.
results are shown in the Table 2 and 3.
The estimated
30
The figures in Table 2-(a) are derived by dividing the column elements of Yl ,
which are shown in Column (c), by the corresponding regional total demands, and they
represent the coefficients of inducement to income per unit of autonomous demand by
each region.
The general features of Table 2-(a) are substantially the same as those
~eg~on
As before, there
~eg~on 06 ~ec~pt
(averages
pattern of autonomous demand in each region, and reflects the fact that the location
of autonomous demand has a substantial effect in determining regional income generation, especially in the income-receiving base.
Table 2-(b) translates this result into the percentage dependency of income
formation by type of regional demand.
last line of the Table, 68.3 percent of all the income comes directly and indirectly
from the initial expenditure in the Middle, and the contribution of expenditures in
the Northeast and in the West are only 11.4 and 20.3 percent respectively.
Further,
as shown in each of the row elements, their regional pattern exhibits a striking
contrast between the advanced and backward areas.
in the
Northeast and in the West the self-dependent ratio of income formation is only
50
The dependency
ratios on the Middle are 40.3 percent in the case of the Northeast and 35.4 percent
in the case of the West.
Table 3 is concerned with the direct and indirect income generation by final
31
TABLE 2
DIRECT AND INDIRECT INCDME FORMATION BY REGIONAL DEMAND *
(a) The coefficients of income-inducement per 1 unit of each region's demand **
demand
origin
of lncome
receipt
Northeast
Middle
West
Average
Northeast
Middle
West
0.597
0.368
0.072
0.066
0.733
0.095
0.045
0.354
0.623
0.117
0.625
0.190
Total
1.037
0.894
1.022
0.932
reglo~
demand
origin
of lncome
receipt
Northeast
Northeast
Middle
West
Average
reglo~
Middle
West
Total
52.6
6.0
3.9
40.3
83.5
35.4
7.1
10.5
60.7
100.0
100.0
100.0
11.4
68.3
20.3
100.0
demand
origin
of lncome
recei pt
reglo~
Northeast
Middle
West
Total
Northeast
Middle
West
6,457
3,976
775
4,942
54,942
7,099
870
6,897
12,157
12,270
65,815
20,031
Total
11 ,208
66,983
19,924
98,116
* Here, the regional demands are the tatals of final demands other than
endogenous consumption expenditure.
** Figures in (a) are derived by dividing the column elements of (c) by the
corresponding regional demands, and figures in (b) are calculated by dividing the
row elements of (c) by the corresponding tatals shown in the fourth column.
32
demand category.
the multiplier side, while on the multiplicand side we include business consumption,
exogenous household consumption and government consumption as exogenous items.
Other exogenous elements are investment expenditure, i.e. gross domestic fixed
capital formation and net inventory change, and export demand.
total is the same as that of Table 2.
coefficients for the Middle area have excessively high values for all final demand
categories.
Looking at the last line of the Table 3-(a) and comparing Columns (1), (2) and
(3) with Columns (4), (5) and (6), the multiplier effects on the household incomes
for the national economy are somewhat higher in the case of exogenous consumption
items than in the case of investment items.
Looking at
the columns for the Northeast and the West and comparing the relative ratios of
leakage to the Middle by each demand item, one finds that investment expenditure
(especially the fixed capital formation) has extremely higher leakage ratios
compared to those of the other autonomous demand items.
This result
33
TABLE 3
DIRECT AND INDIRECT INCOME-FORMATION BY AUTONOMOUS DEMAND CATEGORY *
5
Bus i ness
Exogenous **
Gross
Net
Export Final
consumption household government domestic
inventory
demand
expenditure consumption consumption fixed capital change
total
ex enditure ex enditure formation
a The coefficients of income-inducement er 1 unit of demand
Northeast
0.135
0.152
0.178
0.100
0.120
0.080
Middle
0.633
0.586
0.691
0.609
2.555
0.651
West
0.191
0.254
0.272
0.169
0.173
0.153
Total
0.959
0.992
1.141
0.878
0.848
0.884
of income-formation b t
23.9
39.9
17.3
45.3
22.4
41 .2
19.2
43.6
(c) Di rect and i ndi rect income-formation by type of demand
unit: hundred million en
Northeast
1 ,071
2,931
4,889
1,372 12,270
814
Middle
4,108
11 ,388
29,765
3,760 11 ,191 65,815
West
1,783
4,488
8,259
1 174
2,635 20,031
Total
6,962
18,807
42,913
5,748 15,198 98,116
(unit: %
68.5
46.4
70.8
62.5
57.6
61.9
44.7
24.0
35.5
31.8
26.8
31.5
9.0
5.2
6.0
6.9
6.3
4.7
100.0
100.0 100.0 100.0
100.0
100.0
Northeast
Middle
West
Total
8.3
82.5
9.2
100.0
5.3
88.3
6.4
100.0
7.6
80.1
12.3
100.0
7.8
81.7
10.5
100.0
7.2
82.3
10.5
100.0
7.4
82.2
10.6
100.0
Northeast
Middle
West
Total
4.4
29.3
66.3
100.0
3.2
25.5
71.3
100.0
4.9
43.1
52.0
100.0
4.2
26.4
69.4
100.0
4.8
36.9
58.3
100.0
4.3
34.6
61.0
100.0
34
TABLE 4
f1ATRIX MULTIPLIER OF INCOME-FORMATION (KVB)
1
Agriculture,
Forestry and
Fi sheri es
2
Coal and
Lignite
Mining
3
Mining
(except Coal
and Lignite
Mining)
4
Food and
Kindred
Products
5
Textile
Products
6
Lumber and
Wood
Products
I Northeast
Northeast
.906538
Middle
.243481
West
.053783
Tota
1.203802
1.009660
.280463
.054627
1.344749
.460262
.152632
.030566
.643460
.630688
.242529
.056604
.929821
.676045
.365511
.091897
1.133454
.843026
.268192
.054708
1.165926
Northeast
i~i ddl e
West
Total
Middle
.049332
.821486
.059352
.930169
.027020
.250411
.018038
.295469
.015286
.255333
.018153
.288772
.104287
.561904
.084368
.750559
.064992
.840818
.129003
1.034813
.081788
.821792
.111207
1.014786
III
Northeast
Middle
West
Total
West
.039351
.238634
1.004575
1.282560
.031125
.214965
.851031
1.097121
.008866
.061311
.236874
.307052
.041476
.228554
.689470
.959501
.048937
.445761
.652674
1.147373
.041067
.268799
.914037
1.223903
14
Metal
Products
15
Machinery
(n.e.c. )
16
Electric
Machinery
I Northeast
.532407
Northeast
Middle
.293503
West
".071810
Total
.897720
.415495
.274414
.056836
.746745
.358776
.402575
.061001
.822352
.478679
.380353
.079384
.938416
.386458
.313989
.048321
.748768
.665567
.344897
.083648
1.094
Northeast
Middle
West
Total
Middle
.057636
.691832
.089505
.838973
.052769
.584263
.075990
.713022
.057546
.630782
.076658
.764986
.054532
.683974
.089084
.827590
.054100
.700228
.068522
.822850
.087508
.736311
.102293
.926 12
III
Northeast
Middle
West
Total
West
.040977
.261317
.571499
.873393
.039003
.292234
.411371
.742608
.042746
.339861
.399158
.781866
.045068
.356402
.508611
.910081
.031320
.273683
.447222
.752226
.051917
.299476
.767488
1. 118881
II
II
18
19
17
Transporta- Precision Miscellaneous
tion
Machinery Manufacturing
Equipment
35
7
Pulp, Paper
and Paper
Products
8
Leather,
Leather Products and
Rubber
Products
9
Chemicals
10
Petroleum
and Coal
Products
11
Cerami c,
Clay and
Stone
Products
12
Primary
Iron and
Steel
Manufacturing
.710320
.267046
.057485
1.034851
.704887
.373968
.069501
1.148356
.542014
.236430
.057964
.836409
.488399
.166134
.043218
.697752
.655752
.254498
.056331
.966680
.440545
.191649
.037914
.670109
.427490
.181517
.036507
.645514
.112561
.718789
.136215
.967565
.062787
.783310
.088539
.934636
.060910
.551874
.096881
.709666
.032224
.228896
.047551
.308671
.062738
.688831
.089783
.841353
.059661
.432818
.078980
.571459
.059643
.361897
.063054
.484594
.050683
.266685
.678919
.996287
.041074
.334509
.718384
1.094566
.045674
.227787
.544705
.818166
.016850
.110659
.357799
.485308
.038872
.220726
.664984
.924582
.035173
.182297
.389012
.606481
.060441
.144228
.320252
.524921
20
Construction
23
21
22
Electricity, Wholesale Finance,
Gas, Water
and Retail Real Estate
and Sani tary Trade
and other
Services
Services
24
25
Transporta- Unallocated
tion
and Warehousing
.597559
.342581
.069564
1.009704
.577969
.175603
.034666
.788237
.957569
.250550
.047880
1.255999
.885472
.310845
.053373
1.249689
.813532
.260188
.066172
1.139892
.415535
.235111
.049605
.700251
.071192
.726509
.103628
.901329
.096956
.510829
.083456
.691241
.046641
.918089
.054238
1.018969
.055398
.978103
.065907
1.099407
.071111
.822386
.080381
.973878
.052801
.493789
.081708
.628298
.042013
.318394
.627697
.988104
.026387
.170733
.642278
.839398
.035126
.246350
1.005906
1.287382
.038302
.300031
.942282
1.280615
.069889
.254636
.735568
1.060093
.036963
.244505
.440008
.721476
13
Primary
Nonferrous
Metal
Manufacturi ng
36
suggests that a development program in the backward areas will have to contend with
many leakages in the propagation process and much of the benefits it generates in the
form of income will accrue to the advanced area.
It is instructive to examine how each sector's industrial activity plays a part
in the interregional income-formation process.
attention to the matrix multiplier KVB itself, which is shown in Table 4 having the
order of 3 rows and 75 (= 25 x 3) columns.
Inquiring into the first 3 x 25 part tabulated as the Northeast Column (I), we
can note which Northeastern industries have high leakage-ratios to the Middle area.
These are Electric machinery, Transportation equipment, Leather and rubber products,
and Textile products, all with values in excess of 0.35.
the order of absolute values, if we take the relative ratios of leakage to selfinduced effects, Electric machinery stands out clearly from the other sectors, with
Precision machinery and Transportation equipment next in rank.
In the case of the West, shown as part (III) of the Table, the ranking of
sectors shows a somewhat different pattern compared with that of the Northeast.
The
highest leakage-ratio to the Middle is found in the Textile industry, and next in
Transportation equipment.
self-induced effects are concentrated in some main manufacturing industries, and this
appears to be more a characteristic of the Northeast than that of the West.
v.
The analyses that have been made so far were limited to the income formation
process with the output determination side appearing only in an indirect manner
through the operation of the income multiplier as a matrix.
study the output determination side and compare briefly the analytical results based
on two different models:
These
37
analytical systems have already been given in equations (2.7).7)
Table 5 is a summary version of this comparison.
were computed by using the original Leontief inverse B, and "endo" were calculated by
using the enlarged inverse B[I - CVB]-l or B[I + CKVBJ.
it is f
vectors of the endogenous consumption demand and the final demand excluding
endogenous consumption respectively.
With regards to the effects of final demand by the demand category indicated in
Column I in the Table, the direct and indirect requirements of output in the
endogenous model have higher values (except the household consumption column (2))
than in the case of the exogenous model.
closely it is interesting to see what particular types of final demand have more
influence through endogenous changes in consumption demand.
sectors, we may observe which sectors are relatively more affected by consumption
demand.
regions also.
Next, let us compare the effects of regional demands in the two models.
are indicated in Column II of the Table.
These
II-(a), it is noteworthy that the effects on direct and indirect output requirements
to the OWn
~egion
In other
38
TABLE 5
COMPARISON OF DIRECT AND INDIRECT REQUIREMENTS OF
OUTPUT BETWEEN THE TWO MODELS *
Final demand by demand category
1.
(1)
(2)
Household
consumption**
expenditure
total exogenous
only
Business
consumption
expenditure
exo
el1do
exo
evtdo
(3)
General
government
consumption
expenditure
exo
evtdo
(4)
Gross domestic
fixed capital
formation
exo
evtdo
Northeast
Middle
West
1 ,936
11,914
2,986
3,737 20,982
20,420 106,860
5,665 34,521
3,181
14,448
5,624
3,640
17,844
6,123
7,871
35,910
12,817
Total
16,836
29,822 162,363
23,252
27,607
10,456 18,487
91,527 135,559
23,427 36,699
4.7
4.4
3.9
9.1
7.5
7.3
51.1
39.5
44.7
7.8
5.3
7.3
8.9
6.6
7.4
19.2
13.3
16.6
25.5
33.8
30.3
45.1
50.1
47.5
Total
4.3
7.7
41. 7
6.0
7.1
14.5
32.2
49.0
0.219
1.346
0.337
0.422
2.307
0.640
0.248
1.263
0.408
0.453
2.061
0.802
0.221
1.082
0.371
0.477
2.178
0.777
0.214
1.871
0.479
0.378
2.772
0.750
Total
1.902
3.369
1. 919
3.316
1.674
3.432
2.564
3.900
* The model exo regards the consumption demand as exogenous, and the model
el1do as endogenous; their solutions are given by X = [I - A]-l{fc + f} and
[I - A]-l[I - CVB]-l f
** The consumption in Column-"total" in (2) includes the term f c ' and that in
Column-"exogenous onl y" excludes f c .
39
II.
(5)
Net
inventory
change
exo
I ettdo
(6 )
Final
demand
total
Export
exo
I ettdo
exo
I ettdo
(i)
Northeast
exo
I ettdo
(i i )
Middle
exo
J ettdo
exo
J ettdo
%)
19.3
3.8
4.0
3.7
6.8
6.2
6.1
5.9
11. 7
9.5
12.1
17.7
15.2
100.0
100.0
100.0
100.0
100.0
100.0
64.4
5.5
3.2
50.6
6.3
4.3
31.1
85.8
30.3
(unit:
4.6
42.0
83.0
8.7
39.8 66.5
3.9
6.2
10.7
16.6
100.0
100.0
11.2
10.6
69.0
70.1
0.224
1.481
0.422
0.102
1.863
0.187
2.128
3.696
2.152
2.038 3.798
19.7
7.4
10.7
55.9
40
ov~vaiue
A conclusion to be
With regards to the effects of regional demands on the national economy, the
results are shown in the last line of Column II-(a) or -(b).
model, in contrast to the exogenous model, the direct and indirect output requirements due to demand originating in a backward region (Northeast or West) is lower in
value, while the value due to the demand originating in the advanced region (Middle)
is higher.
things.
As shown in the last line of Column II-(c), in the case of the endogenous
model, the coefficient of output requirements of the Middle takes the lowest ranking
in order.
Just the opposite is true in the case of the exogenous model in which the
coefficient of the Middle is shown to have the highest value among the three regions.
In short, switching the model from exogenous to endogenous means that the output
requirements due to the autonomous final demand originating in the advanced area
increase in ah60lute value, but that the
deg~ee
41
APPENDIX
TABLE a
COEFFICIENTS OF VALUE-ADDED OF THE HOUSEHOLD SECTOR IN EACH REGION
(unitl0- 4 )
Agricul Min- Light Heavy Con- Trade Finance Trans- Others Average
Serv- portai nstructure,Fol" ing i ndustry dustry tion
ices tion
estry
Northeast
Northeast
Middle
West
Total
(Output)
4,638 4,871
8 181
0
7
2,983
43
1
1,061
3,027
996
44
3
1,721
1,863 41 ,026
Middle
Northeast
Middle
West
12
5,386 4,470 1,342
1
1
2
3
0
0
1,377 1,854 4,555 4,652 3,415 8,388
3
2
2
0
2,412
Total
2,414
(Output)
14,503
Northeast
Middle
West
0
0
108
21
23
5,296 4,440 1,140
Total
(Output)
2
0
2
4
86
86
95
5,076 4,934 3,520 1,057
42
2,588
2,631
25
47
994 1 ,919
9,513 1,582 15,075 23,360 5,906 3,553 11,986 2,824 3,432 77 ,232
National average
Northeast
Middle
West
Total
(Output)
98
983
202
450 1,169
55
225
482
569
1,036 1,317 3,481 3,196 2,479 5,776
198
726
993
618 2,151
357
315
1,692
515
2,522
1,189 1,781
2,427 1,151
1,561 1,788
32,294 3,934 85,631 117,865 31,815 24,892 59,620 16,138 16,874 389,065
42
TABLE b
CONSUMPTION COEFFICIENTS OF EACH REGION
Northeast
I~ortheast
Middle
(unit:10- 4 )
Nati onal
I average
West
764
76
2,830
74
0
1,255
2,151
409
140
7,699
87
1
156
5
0
5
8
1
5
268
42
0
43
2
0
2
1
0
0
90
170
11
497
13
0
175
300
57
22
1,245
113
0
1,305
499
0
157
46
11
2
2,133
429
3
3,789
542
0
1 ,321
2,496
600
259
9,439
47
0
961
423
0
165
55
4
0
1,655
302
2
2,828
510
0
907
1,623
389
168
6,729
24
0
133
6
0
4
1
0
0
168
95
2
170
12
0
4
8
2
0
293
612
5
3,388
108
0
1 ,103
2,398
503
137
8,255
199
3
873
32
0
245
533
111
30
2,026
901
76
4,268
579
0
1 ,416
2,198
420
142
10,000
(0.870)
611
6
4,115
559
0
1,330
2,512
603
264
10,000
(0.761)
702
5
4,392
533
0
11 ,270
2,454
507
137
10,000
(0.855)
671
16
4,198
555
0
1,328
2,455
557
220
10,000
(0.794)
* Figures in parentheses in the last line show the total propensity to consume
of each regi on.
** Sectors listed here are aggregated to 9 from the original 25 classifications
for convenience.
CHAPTER 3
FOREIGN TRADE MULTIPLIER, INPUT-OUTPUT ANALYSIS
AND CONSUMPTION FUNCTION*
I.
Inttoducton
There has long been certain defects in the treatment of imported intermediate
goods in the usual Keynesian foreign trade multiplier analysis.
In its fundamental
national product excluding intermediate goods, while M stands for imported goods.
including intermediate products.
On the other hand, Leontief's matrix multiplier model has been devoted exclusively to the analysis of intermediate products in the circular flow; but unlike the
Keynesian model, it lacks a mechanism for the multiplier process via the consumption
function.
Formally, the household sector can be dealt with in the Leontief system
as an industry whose output is labor and whose inputs are consumption goods.
However, a more appropriate procedure in dealing with consumption is not to regard it
as a fictional production activity but to introduce the Keynesian consumption
function in its disaggregated form.
In this chapter, we shall try to close these two gaps by revising the conventional foreign trade multiplier, on the one hand, and by developing an input-output
analysis dealing with the consumption function, on the other. Thus, without
considering the income-distribution structure, we extend our input-output model of
Chapter 1 to an open economy.
It was shown in Chapter 1 that in the case of a closed economy with no foreign
trade, the conclusion that total income varies in accordance with the proportions of
final demand can be obtained only by considering the structure of income distribution
together with the input-output structure.
44
foreign trade, however, the same conclusion can be derived without explicitly
considering the distribution structure.
cients on the production side enter into the income formation process through
imports.
+ P + P + P + ..
1
=~
(3.1)
~ub-muttlpteA ~oc~~
involving produc-
For example, the first item of the above series (the primary additional income
1), is the outcome of the production activity in the sectors favored with the primary
(1 - a) + a(l - a) + a (1 - a) +
Increase in R
(=
a + a 2 + a3
1 - a
=.,.---:-a=
(a)
intermediate goods)
=_a_
(b)
1 - a
But
this procedure is appropriate only in the case where there is no leakage in the
submultiplier process, and in orthodox Keynesian reasoning this condition is satisfied by the assumption that the multiplicand is equal to the autonomous investment
(or export) minuh import of intermediate goods required for the production of
investment goods (or exported goods).
imported intermediate goods required for the production of investment goods (or
exported goods) are treated as an exogenous factor in the multiplier process.
Logically, however, we should treat the imported intermediate goods as an endogenous
factor induced by the initial injection. Thus we should rewrite the above
45
(1 - a) + ay(l - a) + a y (1 - a) + ....
1 - a
= -1-- ay
(a)'
Increase in R
2
3 2
a+ay+ay +
= __a_
(b)'
1 - ay
where y is the self-sufficing ratio of materials (that is, y = B/R) , where B is the
demand for demestic intermediate products.
~l
- a
-ay
<
Obviously, since y
<
1, we have
-- ay
a = h, then we can call 1 - h
primary additional income, but less than 1. Let ~l
the leakage coefficient in the submultiplier process dealing with production
activities.
Since similar submultiplier processes precede all the other secondary increases
in income (due to additional consumption expenditures), the whole income-generating
process can also be given as:
(3.2)
This foreign trade multiplier takes into account the intermediate products in the
circular flow.
Of course, the usual Keynesian foreign trade multiplier generally does take
into account the import of intermediate goods required for the production of
consumption goods, but this is done inadequately.
~xplieit
Nevertheless,
the intermediate goods required for the production of consumption goods, as well as
those required for the production of investment (or export) goods, are not imported
at the income-expenditure level, but in the production-submultiplier process.
In
our multiplier, the import of intermediate goods is taken into account in its proper
context, namely, in the circular flow of intermediate products.
In order to express our multiplier in a form comparable with the orthodox
46
Keynesian multiplier, let X = Y + R denote the total output, (1 - a) = Y/X the value
added ratio, and A = R/Y the material coefficient, then A = ~
= R/X = ~-so that
Y Y/X
1 - a'
1 - a
- a
h=-l_ay=l - a + a -
+ All _
ay
(3.3)
where a stands for the marginal propensity to consume and m the marginal propensity
to import finished goods (p = a - m).
III.
The Modi6ied
Multip!i~
and
~he
Fundamental Equation
6o~
an Open Economy
From this new foreign trade multiplier (3.3), we derive the following conclusions:
(i)
Depending on the industries that enter into the propagation process, our
multiplier has different values since the interindustry average values of A and y
differ with each pattern of propagation. This is a characteristic which is not
found in the orthodox Keynesian foreign trade multiplier.
(i i)
1 _ (a1 _ m) , and coincides with the Keynesian foreign trade multiplier in the case
where induced imports are restricted to finished goods only.
goods required for the production of consumption goods, the Keynesian concept of p
will differ from our concept.
between income and that consumption imputable to domestic factors, in other words;
the value of imported intermediate goods is excluded from the value of consumption.
But this is clearly a nonoperational concept.
necessary in the Keynesian model because all propagation processes are projected into
the income-expenditure side only.
47
two distinct propagation processes, assuming essentially different characteristics.
Our multiplier also can be derived from a revised fundamental equation for an
open economy.
=C+I+E
Y+tI+~
=C+I+E
r--"--\
Y + (R - H) + MC = C + I + E
where
R
tI = the
= total
(3.4)
tI = (R - H) = (1
(3.5)
- y)AY
The economic meaning of this function is that the import of intermediate goods is
not directly a function of Y, but rather a function of AY, i.e., the total intermediate goods required for the production of yl).
goods and the consumption function may be written as ~ = ~(y) and C = c(y)
respectively.
we get
Y + A(l - y)Y + ~(y) - c(y) = I + E
(3.6)
= 1 _ (0 - m) + A(l - y)
-p+A(l-y)
(3.7)
This result coincides with (3.3) derived by working out the geometrical progression which combines the income-circular flow with the circular flow of intermediate
1) The import function of intermediate goods may also be written as:
tI = (1 - y)AY + g
where g is constant. In this case, parameters y and A become "marginal"
coefficient.
48
products.
The parameters y, A, a, which are crucial in our foreign trade multiplier
formula, may have different values depending on the nature of the industries entering
into the propagation process. Therefore, for a more detailed analysis, we must
utilize Leontief's analysis of interindustry relations.
For a comparison with the Leontief system, let ~ = ~/X denote the import
coefficient, then A(l - y) in (3.7) may be converted into the following expression:
A(l - y)
= ~Y = ~/X
= --1:!....-..
Y/X
1 - a
Substituting this relation in (3.7), we obtain another variant for our foreign trade
multiplier:
tJ.Y/tJ.(I + E)
1 - a
(1 - p)(l - a) + ~
(3.8)
Now, if we take the total output multiplier instead of the income multiplier (3.8),
we get
1
AX/tJ.(I + E) = (1 _ p)(l - a) + ~
(3.9)
This total output multiplier (3.9) corresponds to a Leontief inverse matrix in which
the consumption function is integrated. 2) In order to prove this point, we must
turn to the input-output system in the next section.
IV.
A Ma.tJL.i.x MuU-tplieJt
(3.10)
49
where
I
n order
~i
X = [I - A + M]-lf
where
f = fa
(3.11 )
multiplier [I - A + M]-l in (3.11), can be derived by adding the two subseries {al'
and (b)' in the submultiplier process on page 45, i.e.,
..l...:....sf +
1-
ay
_a_ = _ _
1_ =
1-
ay
1 - ay
-=----=-__3)
- a +
of choice-making, i.e., the consumption coefficients, are not as stable as the input
coefficients of the other processing sectors, so that (n + 1) x (n + 1) inverse
3) This is because
ay =
RH
H
R-P1
xIi
= X = -X-- = a
- ~
50
written as follows:
= C(I
fa
(3.12)
- A)X
where C =
It is easily verified that C(I - A) equals the product of the column vector of
consumption coefficients and the row vector of value-added ratios. 4 ) Instead of
(3.12), if we add the nonhomogeneous term to the consumption function, a. becomes a
~
marginal coefficient.
included in
f.
[(I - C)(I - A)
M]X = f
(3.13)
X = [(I - C)(I - A)
M]-lf
(3.14)
inverse [I - A + M]-l multiplied by the inverse [I - CH]-l which shows the effects
4) Denoting by a the column vector of consumption coefficients and by i' the row
vector = (1, 1, ... 1), we then have C(I - A) = ai' (I - A). Since i' (I - A) =
(1 - Ia'l'
1 - Ia.~ 2 , .... , 1 - Ia.w ), the term i'(I - A) equals the row vector of
~
value-added ratios.
51
of endogenous changes in the consumption demand of the household sector. 5 ) The
proof is as follows:
Mr 1
[I - A
M - C(I - A)]
-1
(3.15)
We can refer to the inverse [I - CH]-l as the "subjoined inverse matrix showing the
effect of endogenous changes in consumption. ,,6)
Since the above procedure which distinguishes the inverse
(reflecting produc-
Numerical estimates for the above inverse matrices are presented in this
section.
60~
06
Int~ndUh~
RetatiOn6
1951 and 1954, published by the Japanese Ministry of International Trade and
52
TABLE 1
TOTAL DIRECT AND INDIRECT IMPORT REQUIREMENTS IN JAPAN
(1 )
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Agriculture ( Food)
Agriculture (Textile Material)
Agri cul ture (Rubber t1ateri a1 )
Agriculture (Hide)
Forestry
Fi shery
Coal and Lignite
Crude Petroleum and Natural Gas
Iron Ores
Nonferrous Meta11 ic Ores
lionmeta 1i cOres
Food Processing
Textile and Apparel
Lumber and Timber Products
Pulp, Paper, Print and Publishing
Chemicals
Coal Products
Petroleum Products
Rubber Products
Leather and Leather Products
Stone, Clay, and Glass Products
Iron and Steel Products
Nonferrous Metals
t1achi nery
All Other Manufacturing
Manufactured Gas
Electric Power
Transportation and Communication
Construction
Trade
Business and Personal Service
Textile Rug and Waste
Scrap (Iron and Steel)
Scrap (Nonferrous Meta 1)
Scrap (Others)
Una 11 ocated
1951
Rate of
1954 Increase 1951
0.183
0.857
1.000
0.816
0.052
0.097
0.125
0.852
0.870
0.298
0.404
0.144
0.372
0.049
0.119
0.156
0.111
0.604
0.478
0.525
0.106
0.127
0.161
0.127
0.119
0.093
0.071
0.089
0.073
0.033
0.057
0.427
0.038
0.057
0.077
0.150
0.215
0.873
1.000
0.801
0.055
0.114
0.200
0.935
0.882
0.301
0.435
0,159
0.324
0.058
0.128
0.170
0.172
0.669
0.475
0.538
0.152
0.185
0.238
0.194
0.158
0.163
0.096
0.103
0.101
0.045
0.071
0.193
0.166
0.247
0.079
0.205
(%)
117.5
101.9
100.0
98.2
105.8
117.5
160.0
109.7
101. 4
101.0
107.7
110.4
87.1
118.4
107.6
109.0
155.0
110.8
99.4
102.5
143.4
145.7
147.8
152.8
132.8
175.3
135.2
115.7
138.4
136.4
124.6
45.2
436.8
433.3
102.6
136.7
0.336
0.883
1.000
0.850
0.229
0.266
0.288
0.879
0.894
0.429
0.515
0.304
0.486
0.227
0.279
0.314
0.278
0.678
0.575
0.614
0.273
0.290
0.317
0.290
0.283
0.264
0.246
0.260
0.244
0.214
0.231
0.532
0.215
0.231
0.247
0.307
(II)
Rate of
1954 Inc(~)se
0.405
0.904
1.000
0.849
0.285
0.329
0.394
0.951
0.911
0.471
0.572
0.364
0.489
0.287
0.238
0.372
0.373
0.750
0.603
0.651
0.358
0.382
0.423
0.390
0.362
0.369
0.316
0.321
0.320
0.277
0.297
0.393
0.369
0.431
0.303
0.428
120.7
102.4
100.0
99.9
124.6
124.0
136.7
108.2
101.8
109.8
111.0
119.7
100.6
126.6
85.2
118.4
134.5
110.6
104.9
106.0
131.2
131.9
133.3
134.5
127.8
139.8
128.2
123.7
131.1
129.9
128.9
73.8
171.8
186.6
122.9
139.7
53
TABLE 2
TOTAL DIRECT AND INDIRECT EMPLOYMENT (man)
REQUIREMENTS FOR THE OUTPUT OF ONE MILLION YEN
I!lbl
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
1954
23,468
16,925
111l7TIT
1.51
1.08
13,620
2,990
4,740
3,383
2,260
2,176
2,978
2,950
4,480
2,720
4,831
3,240
3,690
3,012
539
2,210
3,590
3,700
2,850
2,095
3,670
4,450
2,906
2,379
3,203
5,752
4,782
4,250
2,450
2,920
1,206
1,640
3,450
15,639
12,583
13,720
11 ,472
2,922
3,370
10,073
8,662
12,952
9,581
14,393
7,809
12,105
11,395
3,716
7 ,563
8,281
12,286
11,080
9,814
11 ,837
12,966
11 ,425
11 ,529
12,313
14,813
14,448
13,672
10,644
11 ,383
5,970
10,990
11,480
1.15
4.21
2.89
3.39
1.29
1.55
3.38
2.94
2.89
3.52
2.98
2.41
3.28
3.78
6.89
3.42
2.31
3.32
3.89
4.68
3.23
2.91
3.93
4.85
3.84
2.58
3.02
3.22
4.34
3.90
4.95
6.70
3.33
(II )
(II)/(I)
(I)
16,849
16,853
25,827
18,339
1.53
1.09
15,550
15,640
17 ,553
2,939
4,847
3,850
2,719
3,133
4,242
4,306
5,539
3,761
5,488
3,788
4,696
3,653
854
2,961
4,139
4,514
3,654
2,544
4,409
5,346
3,556
3,380
4,512
6,439
5,571
5,556
2,855
2,670
1,414
1,905
3,589
19,569
13,330
14,772
12,906
4,221
4,554
11 ,947
10,848
14,946
7,415
15,956
13,481
13,991
13,445
5,197
8,791
9,364
14,328
13,236
11,740
13,987
15,017
13,611
13,689
14,657
16,513
16,191
15,909
9,143
13,222
11 ,795
12,034
12,928
loll
4.54
3.05
3.35
1.55
1.45
2.82
2.52
2.70
1.97
2.91
3.56
2.98
3.68
6.09
2.97
2.26
3.17
3.62
4.61
3.17
2.81
3.83
4.05
3.23
2.56
2.91
2.86
3.20
4.95
8.34
6.32
3.60
(I)
(II)
54
TABLE 3
TOTAL DIRECT AND INDIRECT CAPITAL
REQUIREMENTS FOR THE OUTPUT OF ONE MILLION YEN
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
(I )
1.8892
.3287
.4241
.6466
.9525
1.0828
.1836
.1455
.7710
.7865
.9631
.9132
.9330
1.0942
1.3756
1.6443
.3845
.7087
.6450
1.2204
1.3554
.864?
1. 1799
1.1092
2.1209
4.9968
3.5677
1.1957
1.2205
4.1621
.3643
.5713
.2946
.3893
1.3050
1951
4.4275
.7602
PI J/lI )
2.34
2.31
1 .8163
.2919
1954
{II J
4.8461
.7824
.9939
3.5860
3.7574
3.7949
.5383
.5473
2.9486
2.6355
3.6216
2.7997
3.8916
3.8336
4.0026
4.4117
1.6128
2.3282
2.1853
3.9939
4.0634
3.4643
3.8868
3.8424
4.9626
7.9102
6.4066
4.0428
4.2218
7.0881
2.1414
3.5536
3.2286
3.2519
3.9445
2.34
5.55
3.94
3.50
2.93
3.76
3.82
3.35
3.76
3.07
4.17
3.50
2.91
2.68
4.19
3.29
3.39
3.27
2.99
4.01
3.29
3.46
2.33
1.58
1.80
3.38
3.46
1. 70
5.88
6.22
10.96
8.35
3.02
.4580
.6872
1.0089
1.0686
.0833
.1368
.8027
.8947
.9384
.7890
1. 1492
1 .2107
1.3616
1.7201
.3406
.7044
.6728
1 .2747
1.3634
.9335
1.1598
1 .3381
2.2182
4.9597
3.5299
1.2378
1.3020
4.2831
.5515
.5320
.2516
.4163
1. 7197
1.2296
3.9549
4.4377
4.1571
.3361
.5927
3.5119
3.0756
4.1963
3.4355
4.8004
2.9552
4.5748
4.9302
1 .6299
2.7482
2.4640
4.5531
4.5059
3.8813
4.2783
4.5900
5.4956
8.4553
6.9034
4.6420
4.8920
7.7757
3.5897
3.6692
3.1813
4.0660
4.7941
(II )
(I)
(Million yen)
{II)/{IJ
2.67
2.68
2.68
5.76
4.40
3.89
4.03
4.33
4.38
3.44
4.47
4.35
4.18
2.44
3.36
2.87
4.79
3.90
3.66
3.57
3.30
4.16
3.69
3.43
2.48
1.70
1.96
3.75
3.76
1.82
6.51
6.90
12.64
9.77
4.36
55
In Table 1, we present the total direct and indirect requirements of imports
due to an increase in demand. The calculation was done in two ways.
Column(I) in
the table shows the import requirements computed by the use of M and the inverse
[I - A + M]-l in (3.11); these figures do not take into account the effects of
f,
imports are relatively more affected by endogenous consumption demand. Similar empirical calculations for total direct and indirect requirements of employment and of
capital (Tables 2 and 3 respectively) show that there are some significant differences in each sector's factor response to endogenous changes in consumption demand.
VI.
Fo.l!JTll.li.a. 60Jr. :the Compu;ta;t<.on 06 :the Subjoined InveMe Showing :the E66ect 06
EndogenoU6 Change.h in COn6ump:Uon
By our formula we
can renew the subjoined inverse at any time when it is necessary. This convenient
computation formula can also be derived more convincingly by tracing the propagation
process from the initial injections.
1)
A=
(I - A)
= (I
= AB
- A
+ M)-l
= (0 10 2
= L o.
i=l
1-
....
o )'
n
56
C = the matrix of consumption
coefficients
_
n
= a~'a = ~ai=l
L na.
'l- 'l-
then we find
(3.16)
Since obviously 0
<
<
<
n<
1, so that II - CHI = 1 - an
>
O.
D - I.
(3.17)
Because of (3.16), the left side of this equation is (CH)2D = anCHD, and hence
1
CHD = ~l
-- H.
- an
Substituting (3.17) for the left-hand side of the above expression, we obtain
1
-_H
- an
(3.18)
D=I+~l
Thus, taking into account (3.15) and (3.18), our final matrix multiplier is
[(r - c)(r - A)
= B[I +
~l
-- H]
- an
(3.19)
For the sake of completeness, a similar formula for the case of a closed economy with
no foreign trade can be derived as:
[(I - C)(I - A)]-l
= [I - A]-l[I _ C]-l
=
1
B[I + .--'--=C
l - a-]
(3.20)
The above formula (3.19) also can be derived by tracing the propagation process
by the initial injections.
57
let
X:
m
Y:
C :
m
then the income-generating process due to the initial injections f can be expressed
as
2'
1'
Y2 ---->
---->
3'
---->
Denoting by M the diagonal matrix of import coefficients, and by C the square matrix
of consumption coefficients, then
from 1
from l'
Cl = CY l
from 2
Y2 + MX 2
from 2'
C2 = CY 2
from 3
Y3 + MX 3
Cl
}
}
(3.2l )
= {I - A)X =
m
Axm
(3.22)
ciix
x m = BCiixm- 1
m-
1
m = 2, 3, ....
(3.23)
We wri te the coefficient of the right-hand side of the above equation as BCA =
then
Xl = Bf
Xm
= QXm_l
m =
2, 3,
....
Q,
58
Hence
Xm
= ~-lXl = ~-lBf,
and since
= BCABB- l = B(CH)B- l ,
(an)m-1 Q
= 2,
3,
(3.24)
Thus
(3.25)
Since 0
<
an
<
1,
Bf + - 1
l_ii BeHf = B[I +.,.----'-=Cl
1__ HJf
(J
en
PART TWO
INTERNAL AND EXTERNAL MATRIX MULTIPLIERS
CHAPTER 4
INTERNAL AND EXTERNAL MATRIX MULTIPLIERS IN THE INPUT-OUTPUT MODEL *
I.
l~oduction
tions between the goods-producing sectors and service sectors, between the primary
growth sectors and the supplementary or derived growth sectors, and between two
regions which have structurally different characters.
The method employed herein is to partition off the original Leontief inverse in
terms of the combined effects of "internal multipliers," "external multipliers," and
their "induced sub-matrix multipliers."
multiplier model" may well be applied to a wide variety of problems, as the usual
Leontief inverse conveys only the ultimate total effects of interindustry propagation
but not the disjoined effects separating into partial multipliers.
Part Two is an attempt to investigate problems of this type by means of the
formulation of partitioned matrix multipliers and their relationships, and to
empirically apply our formula in two cases:
goods-producing sectors and service sectors in the next chapter, and 2) interregional
* This and the next chapter are revised and integrated versions of articles which
60
II.
We divide the n industries of the usual input-ourput table into two subgroups,
designated P sector which consists of Z industries, and S sector which consists of m
Then, the n x n matrix of input coefficients is
industries.
Z + m =n
(4.1)
= (I
- A) -1
(4.2)
tells us something about the total ultimate effects only but not about the disjoined
interdependence of the above two activities, we must introduce some device consisting
of partiti oned matri x multi pl i ers.
elements of the Leontief inverse into three aspects of propagation consisting of the
followi ng:
(i)
aspect will be shown as the "internal matrix multiplier" of the p sector (having
order Z x Z):
(4.3)
(ii)
This
aspect will also be shown as the "internal matrix multiplier" of the S sector
(having order m x m):
T = (I - s)
-1
(4.4)
Of course, each internal matrix multiplier does not operate independently under its
61
own impetus, but is able to operate in conjunction with the other sector's industrial
activity.
(iii)
= BP l
= P1T
= TS l
If we select the
coefficients of the induced effect on production (i.e., B2 and T2 ) as the base, then
they will take the form
(4.5)
or alternatively
(4.6)
Of course L, the external matrix multiplier of the P sector, has the order txt,
and K, the external matrix multiplier of the S sector, has the order m x m, because
62
LB
and
LB
=N
or
= (I-A}-l
l
.[
B + Btml
B-!d
MEl
NTl
T2N
T + T~Tl
(4.7)
l.
(4.8)
= (I -
A}-l
in terms of the combined effects of internal and external matrix multipliers and
their induced sub-matrix-multipliers.
effects in both P and S sectors, originated each in its own sector's activities, can
be written in the additive 6orom B + Btml or T + TzNT l as well as the muttpiied 6orom
1) Another formul ati on of the "external matri x multi pl i ers" based on the coeffi ci ents
L = (I - T1Bl}-1
(Z x Z)
(4.5)'
(m x m)
(4.6) ,
and
where K has the order m x m, and L has the order Z x Z.
The existence of these inverses (external multipliers K, L, K and L) as well as
the existence of internal multipliers (B and T) is warranted by the existence of
the original Leontief inverse matrix.
For the existence of a meaningful solution for Leontief model and the properties
of Leontief-type matrices, see Chapter 1, Section IV, l}.
63
LB or KT. 2), 3)
I B,?!] [ I - P I -Pl ]
M L -Sl
I - S
[ B + Btml
MBl
= r~]
L~
= I + B'?!SlB(I - p) - BzMSl
=I
= I + B'?!Sl - B'?!Sl
MBl (I - p) - MS l
= MS1B(I - p) - MS l
=
MS l - MS l =
2) Using the notation in note 1), we can prove the following identities:
KT=TX=M
LB=BL=N
that is, the internal multiplier potmutti~ed by the external multiplier is also
possible as well as the p~em~ptled expression.
The proof of the latter identity is that:
LB = (I - B2T2 )-lB = [I +
m=l
because
and
m=l
Y(T1Bl)m = m=lY(P1TS1B)m
m=l
Pl(TS1BP1)m-1TS1B = Pl [ (T~2)m]TBl
m=l
m=O
= Pl(I - T2B2)-lTB l = P1KTB l = P1MB1
=
So, we obtain
LB = (I + BzMS1)B = B + BfD31
= B(I + P1MB1 ) = BL.
In exactly the same manner, we get
KT = XX = M.
3) For the equality between the multiplied and additive forms, see the equation (*)in
note 2) above.
64
- B2 - B2XT 2B2 + B2XT(I - S)
- B2 - B2XT 2B2 + B2X
- B2[I - X(I - T2B2 )]
=-
B2(I + XT 2B2 -
x)
=0
- MB1P l + M(I - S)
- XTB1P l + KT(I - S)
(vi) The divided matrix means that we use the following system:
x = PX
P
+ P1X + F
s
P
= SlXP
(4.9)
+ SX + F
s
sector's industries, and F ,F are the final demand vectors of the P and S sectors
p
respectively.
or
][~l.
The partitioned intersectoral activities may be viewed in two ways:
(4.10)
(a) The
first expression of the formula (4.10) shows it from the perspective of the P sector
and (b)
the second expression shows the same fact from the perspective of the S
sector.
to a variety of problems.
One more alternative expression of the Leontief inverse in terms of partitioned
matrix multipliers is
65
B*
__ t_=LB_+-L__
BKTT-=-l:. . . ]
= (I - A)-l = --:::LB~+-L-::B:=2T_]
~KT_B
'"
KT
KTB1
4.11)
We can easily prove the identity between this expression and equation (4.10).4)
Mathematically, our formula also provides us with a method of working with lower
order matrix-calculations, which is especially useful when the inversion of matrices
of high order is not suitable for available computational equipment.
II 1.
An empirical application of our model is made for the interregional-interindustry data of the Japanese economy. The main purpose of the interregional
input-output model developed by Isard, Leontief, Moses, Chenery and others,5) is to
analyze the interrelations among trade and production in two or more regions. Our
interna1-and-externa1 matrix multiplier model, in a somewhat extended form, may be
more useful for this purpose, because the inverse of the usual interregional
input-output model depict only the ultimate total effects but not the disjoined
effects separating into interdependence between each regions internal and external
multi p1 iers.
One example of an interregional input-output table is the data published by the
Hokkaido Development Bureau which divides the Japanese economy into two regions, each
having the same number of industries (30 industrial sectors).
In terms of our
formula (4.7), we let the P sector be Hokkaido and the S sector be the Rest of Japan.
For convenience we call the latter region Honshu, the main island of Japan. Of
course, Z = m = 30, and n = 60.
Table 1 is concerned with the internal and external matrix multipliers in each
4) For example, the identity KTt
is shown as follows:
T2N
in which I +
= T2N
Tt~
T2N
= K because
(I - Tt2)K
= I, so we obtain
5) See, W. Isard [22], W. W. Leontief [29], H. B. Chenery [5] [6], L. N. Moses [38].
66
region.
However only the column sum or row sum of the elements of the matrices are
of dispersion" of industries in each region, and the row sum measures "the sensitivity of dispersion" for industries in each region.
As shown by the figures in the Table, the internal propagation in Hokkaido (B)
has a multiplier effect of 1.77 on the average, and it evokes in turn a round-about
external repercussion through Honshu's industrial activity (L) of about 0.7%-up
effect on the average, so that the total effect is equal to 1.77 x 1.007
the average.
= 1.782
on
considerably higher 2.53, but the round-about external multiplier (x) shows only a
0.3%-up effect on the average.
(30 x 30) by the elements of the appropriate (30 x 30) part in Leontief
inverse B* , we obtain the values which may called "inside propagation ratios" of
Hokkaido's industries. Although the table of the calculated figures is omitted, from
it we find that the most self-sufficing industries in Hokkaido are those in the light
industry group such as textiles, rubber products, leather and leather products,
printing and publishing, miscellaneous manufactures, and those in the non-manufacture
group such as services, trade, public utilities.
The industries in this category are relatively independent of Honshu's industrial
activity, and their "inside propagation ratios" all take values more than 0.9.
At
non-ferrous metal products, and the resourse industries such as metal mining,
non-metal mining, pulp, paper and paper products, fishing, etc.
Such internal propagation patterns, together with the external input patterns of
interindustry activity in each region, depict the characteristics of interregional
repercussions whose estimated results are summarized in Tables 2 and 3.
In these
67
TABLE 1
SUMMARY
TA~LE
--------------------~------------------~--------------.----
68
form for both the column sums and the row sums of the four sub-multiplier matrices
B2 , T2 , Bl and Tl
Industries listed are only those having higher values than the
average.
The sub-multipliers B2
= BP l and
T2
production activities in each region induced by the input activity in the other
region.
industries, the elements of the multiplier T2 have higher values than those of the
multiplier B2 , with an average value of 0.3806 versus 0.0159. A similar situation is
found in the comparison between Bl
= SlB and
Tl
ment effects of one region on the other, where the average value for Bl is 0.1847
versus 0.0207 for T l . These results suggest that a development program centered in
Hokkaido will give rise to many leakages in the interregional production process and
will generate much benefit to Honshu's industries.
We cite here one specific example of the nature of the regional industrial
interrelationship:
by Hokkaido's input is the extremely high row sum value of 2.303 as shown in Table
2-(a). This high value has its origin in Hokkaido's industries such as steel
products and machinery as shown the column sum figures in Table 2-(b). Of course,
to understand the cross-effects of this sort in detail, it is necessary to trace
back the source of the elements in the underlying matrices themselves instead of
simplying examining column sum or row sum values.
In any case, analyses of the above sort should playa role elucidating the
inherent properties of inter-and-intra regional industrial relationships, and we may
expect a fruitful application of this method (combining the extended model in the
next section) to the comprehensive data of the Japanese interregional input-output
table compiled by the Ministry of International Trade and Industry. This will enable
us to study the patterns of industrial interrelations among the nine regions of the
Japanese economy.6)
6) A report on this MITI 9 blocks-interregional input-output table [24] that took _
t~ree years of preparaEion_was published in 1967.
The nine regioDs are Hokkaido,
Tohoku, Hokuriku, Kanto, Tokai, Kinki, Chugoku, Shikoku and Kyushu.
69
TABLE 2
SOME COEFFICIENTS OF INDUCEMENT TO PRODUCTION
PER UNIT OF INPUT IN THE OTHER REGION *
(a) Row sum of elements of T2
Honshu's industry
Iron and steel
Textiles
Chemicals
Agriculture
Machinery
Metal mining
Leather and products
Coa1 products
Pulp, paper and products
(Average)
Hokkaido's industry
2.3033
.8631
.8006
.5751
.4907
.4317
.4097
.4016
.4016
.3806
Coal mining
Pulp, paper and products
Iron and steel
Forestry
Transportation
Fishings
Agri cu 1ture
Processed foods
Trade
(Average)
.0812
.0614
.0448
.0284
.0277
.0267
.0252
.0208
.0165
.0159
Steel products
2.2120
Leather and products
1.2278
Machinery
1.0868
Nonmetallic mineral products .8064
.6211
Textiles
Miscellaneous manufactures
.4637
Rubber products
.3936
(Average)
.3806
.0577
.0520
.0502
.0419
.0374
.0357
.0319
.0255
.0211
.0168
(Average)
.0159
* Sectors listed here are the industries having row sum or column sum values
higher than the average.
** Table (a) or (c) lists the names of the industry receiving the induced
effects, and (b) or (d) lists the names of the industry giving the induced effects.
70
TABLE 3
SOME COEFFICIENTS OF INDUCEMENT TO INPUT BY
INTERNAL PROPAGATION IN THE OTHER REGION*
(a) Row sum of elements of Bl
(Average)
Hokkaido's industry
Honshu's industry
Iron and steel
Machinery
Chemicals
Textiles
Leather and products
Processed foods
Metal mi ing
Agriculture
Coal products
Pulp. paper and products
Stee 1 products
(c)
1.0728
.5409
.4335
.4243
.3962
.3675
.3232
.2978
.2906
.2396
.2349
Coal mining
Pulp paper and products
Iron and steel
Processed foods
Transportation
Fishing
Agri cul ture
Nonmetallic mineral products
.1521
.1034
.0865
.0462
.0339
.0336
.0241
.0214
.1847
(Average)
.0207
Steel products
Nonmetallic mineral products
Leather and products
Machinery
Textiles
Miscellaneous manufactures
Fishing
Nonferrous metal products
Chemicals
.6243
.4534
.4517
.3721
.2629
.2387
.2354
.1960
.1951
.0474
.0451
.0427
.0410
.0368
.0353
.0320
.0303
.0275
.0212
(Average)
.1847
(Average)
.0207
* Sectors listed here are the industries having row sum or column sum values
higher than the average.
** Table (a) or (c) lists the names of the industry receiving the induced
effects, and (b) or (d) lists the names of the industry giving the induced effects.
71
IV.
Some Ex.:telt6ioY/-6
06
the Model
The model suggested in this chapter may be extended in two directions. The
first direction is an extension of the input-output model in an "intensive" manner.
The other direction is an extension of an "extensive" nature where the input-output
model is used in conjunction with various other models such as the macro-econometric
model, the linear programming model, and so forth.
concerned with intensive type extensions, and we limit our interest to the following
two cases.
1)
06
PaJrA:.Ui..Orted GJLOUp.6
procedure of dividing the model into a large number of industry-groups (or regions)
tends to degenerate into formalism, or is apt to be too complex.
to too much form at the expense of the empirical spirit. 50, we prefer to employ
"a method of localizable partition" in which the redivision of groups is limited to
some particular strategic parts of industries (or regions).
The procedure of the extension employed here consists of two steps.
The first step is the re-partition of some "internal matrix multiplier",
step 1.
If we redivide the
5 sector into two sub-sections designated section 5-1 and section 5-2, it will lead
to the repartitioned matrix of input coefficients as follows:
p
sector
p
-~
A -
Uo
Vo
5 sector
f-ls::2
aO
vl
al
ul
v
)z
)j
)k
j +k = m
Z+m= n
(4.12)
From the above coefficient matrix, we get the following relationships for the 5 sector's industrial activities:
72
ii)
= (I
- u)
= (I
- v)
-1
-1
xk
(4.13)
(4.14 )
=a
j Xk
(4.15)
Rvl
= Il
(4.16)
iii) Localized external multipliers of section 5-1 and 5-2 inside the 5 sector (i.e.,
the meaning of "external" in this case is limited to within the 5 sector and
not beyond it);
U = (I - as)-l
V
= (I
- Sa)-l
(4.17)
(4.18)
k Xk
Then, according to the formula (4.11), we have the internal multiplier of the whole
5 sector in the redivided form, i.e.;
T
= (I
sf
-u l ]
[I = -Vl I I - v
U
-1
rLVSQ
UQ I UaR J
VR:J
(4.19)
<5 sector>
section
5-1
section
5-2
73
With the aid of this Chart, we get six routes of inter-and-intra sectoral inducement relationships shown as follows:
(a)
(b)
(c)
<order of matrices>
<sub-multipliers>
<inducement routes>
5-2 -> 5-1
a.
= Qu l
j x k
fl
= Rvl
P -> 5-1
a = Q(u O + U1Rv O)
xZ
P -> 5-2
, = R(V O + V1QuO)
k xZ
5-1
A = B(aOU + alVRv l )
Zx
->
5-2 -> P
Zxk
= B(alV + aOuQul)
The formation of these six sub-multipliers showing induced effects on production activity may be easily verified by tracing the repercussion routes between the above
sectors or sections in the Chart.
We have now arrived at a formula of the partitioned matrix multiplier, in this
case, which can be stated as follows:
[ LB
or
=
LAQ
LB
UaLB U(I + aLA)Q U(a. + aLIl)R
V,LB
L~R
V(fl + ,LA)Q
V(I +
,L~)R
(4.20)
The main course of the derivation of the formula (4.20) is that the system
X = PX + a_X + alX + F
P
P
(ru
v
p
{
Q)
+ FU
XU
(4.21 )
can be solved in a partiality form for the production level of the 5 sector (regarded as equations
74
[:: 1
Va
UQ
UaR
Vt
Vf3Q
VR
(4.22)
substituting this equation into (!) and collecting terms gives the formula (4.20).
By this formula, we see that the external (not localized) matrix multipliers of
sections S-l and S-2 are equal to UtI + aLA) and V(I + tL~) respectively.7)
There are two advantages in applying this formula to practical problems.
First,
the number of industries in each partitioned sector (or section) may not necessary be
the same (i.e., Z ~ j
k), and secondly the above treatment can be adapted for the
further subdivision of the particular part of strategic sectors or sections in succession, so we get a method of studying the various characters of industry groups
(or regions), say, according to their differing roles in the national economy.
2)
Inclu6ion
PJtoc.e,6~
The next extension of our model is the inclusion of the income generation process which is omitted in the usual input-output model. This omission is justified
only if the level of income and its use do not depend on the composition of production, because in this case a disaggregation of income generated by sector will add
nothing to an analysis of the aggregated Keynesian type.
But a more
75
CHAPTER 5
AN ANALYSIS OF THE INTERDEPENDENCE
BETWEEN SERVICE AND GOODS-PRODUCING SECTORS*
I.
rntAoductio~
There are two opposing views regarding the relationship between the
goods-producing sector and the service sector, and this divergence of views has
some relevance in light of the recent growth of service sectors in some advanced
economies.
goods-producing activities; the income of the former is seen as derived from the
income of the latter, i.e., a "redistribution of income" originated with
goods-producing activities.
The distinction between "productive" and "unproductive" labors employed by Adam
Smith, and the concept of surplus value employed by Karl Marx, are some of the
earliest expressions of this orthodox view.
services, while the orthodox economics laying weight on the two-dimentional relation
in production and service activities.
These differences have been reflected in the oppos i ng "nati ona 1 economi c
accounting systems" of the present day.
77
National Accounts of the United Nations, employed for the economic accounts of many
capitalistic countries, includes both income from service activities and income from
goods-producing activities as part of the National Income.
service activities have an internal relationship rather than a parallel one, we must
take this into consideration together with the modern economic view.
In this chapter we shall present some linkage for the gaps just described and
shall formulate the interdependent models of the goods-producing sector and the
service sector both by methods of income analysis and of input-output analysis with
some tentative empirical illustrations.
II.
Denoting by Y the national income defined by the usual SNA concept, we divide Y
into two components:
Yp '
(5.1)
+Y
where Yp may be regarded as the national income defined by the MPS concept.
If we
define q as the propensity to consume service and ignore the intermediate services
for simplicity, then the demand for services, i.e., qY, must be equal to the supply
of services in equilibrium and we have
(5.2)
Substituting (5.1) in (5.2), we get
Y =~.y
s
1 - q P
(5.3)
This equation (5.3) demonstrates that the level of service-income Ys depends on two
factors:
services.
78
The first factor reflects the correlation of the level of service activities
with the level of goods-producing activities so that the latter determines the former as argued by the orthodox economists. As shown by the equation, service
activities will expand with a higher level of activities in goods production. The
second factor reflects the structure of demand as asserted by many modern economists.
Since the income-elasticity of demand for services is greater than that for goods,
the degree of growth in the service sector would depend on the order of increase in
the propensity to consume services. Higher propensity would generate a higher level
of service activities.
The form of expression (5.3) is very similar to the Keynesian multiplier
equation, and in effect we can interpret it to be the result of the propagation
process caused by the goods-producing activities through the expenditure of income.
Justification for this assertion is as follows.
po~t;
plus the
Given
po~t.
Y supply
of good~
II
demand .J
for goods
<total>
= _8_ y
savi ng
1 - q
consumption
of goods
:~/;~/~r:P
tit i t
consumption
of services
income from
service activities
national product
p]
=_p_y
Y=Y
+Y
=Y
+ P
--Y
l-qp
=Y
1 - q P
Y
demand for
1 - q pservices ~
= -fl-
2
3
-fl- Y
Y = qY + q Y + q Y +... = 1
8
-q P
supply of
services
II
+-fl-y =_l_y
1 - q p
1 - q P
Of course, the convergence conditions are generally satisfied by the assumption that
the value of q is less than one.
We could define the multiplier
79
multiplier equation may be one way of synthesizing the orthodox view of the relationship between goods and services with the modern Keynesian expenditure viewpoint.
In any event, the growth of the service sector must be explained in terms of both
demand and production.
The last line of the above table, i.e., the equation on national product,
y = ___1___ y
1 - q p'
(5.1).
income defined by SNA (i.e., Y) and the national income defined by MPS (i.e., Y ).
P
Some popular explanations for growth of the service sector in recent years are
often expressed in terms of employment rather than in terms of income.
Our formula
(5.3), expressed in terms of the income base, could be transformed into the employment base so that
L
--11- :.: L
1 - q YB P
(5.4 )
where LB ,Lp are levels of employment in the service sector and in the goods-producing
sector respectively, and
Y
YB-..lL
-L'
B
-...l2.
p-L
(i)
employment
2) C. Clark [lOJ.
80
relatively slower growth of productivity in the service sector, as pointed out mainly
by V. Fuchs. 3 ) And the third element,
L ,
tisement and information, and the sum of these expenditures by firms influences the
value of q, or according to K. Galbraith, there are "dependence effects" or a shift
from "accepted sequence" to "revised sequence" in the relation between demand and
production in the market-place. 5) In a comment on Galbraith, R. Solow points out the
possibility that the effects of advertising by various firms may offset each other. 6 )
Still, we cannot overlook the existence of such effects.
3) V. Fuchs [13].
4) W. Galenson [15].
5) J. K. Ga 1bra ith [14], ch. [19].
"The unidirectional flow of instruction from consumer to market to producer may be
denoted the Accepted Sequence" (p. 221). " ... the accepted sequence is no longer
a description of the reality and is becoming ever less so. Instead the producing
firm reaches forward to control its markets and on beyond to manage the market
behavior and shape the social attitudes of those, ostensibly, that it serves. For
this we also need a name and it may appropriately be called The Revised Sequence"
(p. 212).
6) See R. M. Solow [48], p. 105.
81
o~g~nating
in the goods-produc-
information, but also interest costs, rent, transportation, insurance rates, etc.
These costs are transferred from the goods-producing sector to the "tertiary sector"
as income. The increasing trend of such income-transfer coincides with the fact that
growth in the goods-producing industries reflects the increased activities in the
service sector.
Then, denoting by
the service sector, and by Y; income 4eeeived in the goods sector, we get
Y'
=Y
- T
(5.5)
Here Yp is income as defined by the MPS concept, whereas Y'p is the income of the
goods-producing sector in the usual sense employed by national accounts in capitalistic countries. Denoting by Y'8 the income of the service sector in the ordinary
sense, namely, on an income received basis, we have
= Y8
Y'8
+T
(5.6)
So, if we let
_ T
a - Y'
'
(5.?)
1 - q p
(5.8)
An increase in
82
=~
~
1 - q y'
(5.9)
'
y'
y'=-.R
L
P
respectively.
The tendency toward increase in the parameter a is illustrated by Table 1, which
is due to M. Shinohara. 8 ) Figures in Column (a) of Table 1 indicate the gross valueadded in manufactures according to Industry Census Statistics, where manufactures'
income is on the income-originating basis.
Consequently, if we choose the latter rather than the former, namely (5.3)
fE+ - 1.
83
TABLE 1
DISCREPANCY IN MANUFACTURES' INCOME
BETWEEN INDUSTRY CENSUS AND INCOME STATISTICS
(b) Income of
manufactures
(by Income Statistics)
-ffi-
1952
13,000
11 ,629
89.5
11.7
1953
16,864
13,092
77.6
28.8
1954
18,959
15,358
81.0
23.4
1955
20,986
15,348
73.1
36.7
1956
25,437
18,575
73.0
36.9
1957
29,522
24,082
81.6
22.5
1958
31,748
24,556
77 .3
29.3
1959
38,467
27,138
70.5
41.8
1960
50,348
36,390
72.3
38.3
1961
61,898
44,257
71.5
39.8
1962
71,505
49,815
69.1
44.7
1963
81,709
55,509
67.9
47.2
1964
94,619
63,935
67.6
47.9
Date
(l
base," and those in column (b) show the manufactures' income in "income-received
base."
*** Column (l is an addition by the author.
(l = {(a)/(b)} - 1.
84
The other side, showing that service activities determine the level of
goods-producing activities, also exists, particularly if we take into account the
development of information-service industries in recent years.
The importance of
Rather we must
problem to future work lO ) and instead consider the twofold interaction between these
sectors from some other standpoint.
(iv)
Fourth, the approach to income analysis manifested in (5.3) and (5.8) has
one crucial limitation, namely, services are treated only as final products.
If
services did only constitute final products, then we could legitimately condust our
analysis in income terms.
85
III.
off the original Leontief inverse in terms of the combined effects of ninternal
multipliers," "external multipliers," and their "induced sub-matrix multipliers."
Such an "internal-and-external matrix multiplier model" is appropriate for our present problems, as the usual Leontief inverse conveys only the ultimate total effects
but not the disjoined effects separating into partial multipliers.
At the risk of
being too repetitive, we summarize the results of our theoretical ideas and then
discuss the results of two empirical studies dealing with the interaction between the
goods-producing and the service sectors.
1)
We divide the n industries of the usual input-output table into two subgroups
designated P sector, i.e. goods-producing sector which consists of Z industries, and
S sector, i.e. service sector which consists of m industries.
PX + P1X + F
P
= SlX
SX
(5.10)
8,
where X ,X are output vectors and F ,F are the final demand vectors for the P and
p
S sectors respectively.
ways:
(a) the first expression of the formula is from the P sector's viewpoint and
As shown in Chap. 4,
where
= LB,
t;: 1
[T;N T:T~2NT j
= KT, in which
= (I
prl and
(5.11)
= (I
86
intersectoral propagation activities between the P and the S sectors' industries, are
The first empirical application of our model utilizes the interindustry data,
consisting of 50 goods-producing industries and 4 service industries, of the Japanese
economy published by the Japanese Government under the cooperation of the Economic
Planning Agency and five other Ministries (the t1inistry of Agriculture and Forestry,
the Ministry of International Trade and Industry, the t1inistry of Construction, the
Statistics Bureau of the Prime
Agency).
t~inister's
(50 x 50), calculated from the above equation, by the elements of the
Roughly
0.9.
87
TABLE 2
INDUSTRY GROUPS BY DEGREE OF DEFENDENCE ON SERVICE ACTIVITY
Groups
Group A
Group B
Group C
Group D
0.8 range.
88
Leontief inverse B* and the values of the elements in the internal matrix multiplier
B, which is equal to BzMB 1 as is shown in the formula.
could be counted on the fingers of both hands (excluding the Undistributed sector),
while in Table 3 (B 1 ), values of more than 3% are numerous.
inducible power of one sector to another is more powerful in the case of the goodsproducing sector than in the case of the service sector.
K,~nd T
The values of
elements in the internal multiplier T are somewhat higher than those in the external
multiplier K (except Real estate's column), but the difference between the values of
these two multipliers is not so large.
12) One comment is needed because of the weakness in the data of the service sector
which leads to the estimation errors in the original Leontief inverse matrix. If
this data weakness is not negligible, our method must be reread in such a way
that the proportion of errors in the elements of the Leontief inverse is actually
due to a shortcoming of the service sector's data. For example, the reliability
of the inverse-elements may be judged by means of Table 1 such that those in
Group A-l are the most reliable and those in Group D-2 are the most unreliable.
89
TABLE 3
COEFFICIENTS OF SERVICE-INPUT INDUCED BY INTERNAL PROPAGATION IN GOODS-PRODUCING SECTOR*
(unit: 10 -6 )
B'l = (81B)'
TranSJX)rtaBanking,
tion and Real
Insurance
Sector
Trade Communi
ca- estate and
tion
Servi ces
28382
10876
12243
Rice, wheat and barley
347
18595
15910
50790
614
Miscellaneous crops
61239
27121
24374
897
Livestock
13509
10888
1830
23862
Forestry
54357
21559
6341
40338
Fi sheri es
22829
31772
Coal and lignite
32782
4228
25045
39486
Crude petroleum and natural gas
30837
27628
23816
20216
26165
8939
Metallic ores
21651
15567
20540
4514
Non-metallic minerals
14102
Rice and barley polishing and grain-flour mills 55809
16636
755
Starch, sugar, seasonings, etc.
116074
26157
2085
32663
Manufactured tobacco and beverages
33969
15115
767
19457
Miscellaneous processed foods
38199
40303
95402
2984
Natural fibre yarns
26100
28528
16786
1944
Chemical fibre yarns
52525
51397
5743
50083
Fabrics
34169
55940
5023
40814
Miscellaneous textile products
71816
32592
4105
46784
Saw-mills and plywood
18568
15909
2841
34709
Furniture and wood products
37096
39130
3036
49755
Pulp
32338
27412
35650
3631
Paper and paper products
46449
45912
2881
36683
Printing and publishing
52511
63314
87273
2326
Coal products
27008 147083
27438
3056
Petroleum products
11974
17553
10508
7081
Basic chemicals
40572
96450
4175
35066
Chemical fertilizers
39844
45497
67430
2948
Intermediate chemicals
83199
48159
56255
5579
Drugs, soap and cosmetics
82932
44149
5963
128804
Rubber products
39029
27059
3449
37856
Leather and leather products
39011
17434
26308
2685
Non-metallic mineral products
66153
66697
4087
36925
Pig iron, ferro-alloys, crude steel
24252
57757
16368
2506
Steel casting and forging
41869
46669
3209
26740
Rolled steel
29437
3383
23905
56458
Non-ferrous metal ingots
26865
38975
15111
5811
Primary non-ferrous metal products
30039
37476
4037
21291
Metal products
44686
42068
2468
26247
Machinery and instruments
56789
37272
6127
34695
Electric machinery and equipment
74690
38973
34070
2560
Transport equipment
76278
41917
2686
29493
Repair and maintenance of machinery, etc.
70881
46947
3204
25575
Miscellaneous manufactures
73958
37369
3834
47743
Electricity
23340
51460
6996
29435
City gas and water services
38028
40696
54657
2783
Business consumption expenditure
65213 236774
453851
816
Building construction
69495
59666
3624
33835
Miscellaneous construction
53675
68526
3734
37094
Office supplies
145474
56522
3146
57429
Scraps
8902
12466
612
4975
Undistributed
60336
36822
15166
68993
90
TABLE 4
COEFFICIENTS OF INTERNAL PROPAGATION IN GOODS-PRODUCING
SECTOR INDUCED BY INPUT IN SERVICE SECTOR
Sector
Rice, wheat and barley
Miscellaneous crops
Livestock
Forestry
Fisheries
Coal and lignite
Crude petroleum and natural gas
Metallic ores
Non-metallic minerals
Rice and barley poiishing and grain-flour mills
Starch, sugar, seasonings, etc.
Manufactured tobacco and beverages
Miscellaneous processed foods
Natural fibre yarns
Chemical fibre yarns
Fabrics
Miscellaneous textile products
Saw-mills and plywood
Furniture and wood products
Pulp
Paper and paper products
Printing and publishing
Coal products
Petroleum products
Basic chemicals
Chemical fertilizers
Intermediate chemicals
Drugs, soap and cosmetics
Rubber products
Leather and leather products
Non-metallic mineral products
Pig iron, ferro-alloys, crude steel
Steel casting and forging
Roll ed steel
Non-ferrous metal ingots
Primary non-ferrous metal products
Metal products
Machinery and instruments
Electric machinery and equipment
Transport equipment
Repair and maintenance of machinery, etc.
Miscellaneous manufactures
El ectri ci ty
City gas and water services
Business consumption expenditure
Building construction
Miscellaneous construction
Office supplies
Scraps
Undistributed
TrCll5portation and
Trade Communication
3089
2242
3990
4058
1169
1079
11461
15325
2103
1156
3005
29780
73
1616
430
1642
692
2136
2725
1959
3396
3126
7770
1782
7226
8824
3240
4244
1420
1770
4038
4231
3241
4515
11377
17033
7463
3619
7519
3273
27389
11564
29721
10536
1142
13318
1739
46832
1608
2455
579
578
5821
7316
4200
1521
1497
8185
492
445
2238
7239
3897
15750
1117
4956
4982
20187
1038
3919
1621
7347
3532
7256
1924
7657
1800
4128
539
15919
12526
51220
5627
1773
6751
15826
1427
2142
81569
18212
0
0
0
0
37665
4861
3396
7789
45826
82680
Banki ng,
Real Insurance
estate and
Services
29239
347
19022
4637
14622
571
10104
12491
417
18837
8463
3805
152
60
2057
938
1191
2169
28287
582
13335
754
39452
708
51582
2185
1263
4274
1610
374
4434
912
4332
465
15608
5156
1387
2959
4573
749
16491
2640
28052
2566
2857
4028
1743
3608
1079
4008
3375
465
4482
18662
462
21077
2142
4592
215
1204
16036
5135
19479
7558
2441
12340
22222
9382
4924
2325
2412
8507
17153
6619
15969
5234
11355
1660
4408
9116
168849
13629
1358
5097
3510
14921
544
6594
41333
7124
0
0
0
0
1496
8926
9057
6812
16110
42035
91
TABLE 5
INTERNAL AND EXTERNAL MULTIPLIERS IN SERVICE SECTOR
(1)
= {I
- 8)-1
Transportation
and
Communication
Real
estate
Banking,
Insurance
and Services
1.006382
14208
1618
40780
49969
1.020766
1205
30004
Real estate
20839
4942
1 .000402
12839
61886
54474
31979
1.042842
(2)
Trade
Trade (wholesale and retail)
Transportation
and
Communication
Real
estate
Banking,
Insurance
and Services
1.018500
14691
13090
21801
28305
1.015694
10241
21579
2004
2449
1 .000991
2099
49081
20060
8373
1.034038
2)
= P 'p
+ 8 'p
1 s
(5.12)
where pp ,p8 are vectors of prices of the P sector's products and the S sector's
92
output, and tne coefficient matrices p' and Sl' are transposes of the matrices p and
Sl in the quantity model.
This price formation equation system (5.12) is a part of the following larger
model:
1
p
= p' pP
+ Sl 'p + v
8
P
= P l 'pP + s' p8
(5.13)
+v .
S
this latter relation. Of course, the selection of endogenous and exogenous variables
is dependant upon the nature of the problem which we set forth.
The vector of determined prices in the goods-producing sector is represented by
the equation:
p
p
(I - p'rl{Sl'p
=B'{S'p
+ v }
+v}
p'
(5.14)
where B' is the transpose of the internal matrix multiplier of the P sector in the
quantity model.
If service-prices rise from p 8 to p8 + dp S , the resultant price-increases in the
P sector wi 11 be
dp
P
= B' S1
'dp = (s B)' dp = B 'dP .
81818
(5.15 )
Thus, in order to determine the cost-push effects of a rise in the levels of service
prices we need to transpose the sub-matrix multiplier Bl of the quantity system.
Returning to Table 3 and examining it from the perspective of cost-push effects,
we discover that:
in the prices of the Trade industry and of the Transportation and communication
industry than by a rise in the prices of the other service sectors, and (b)
the
93
~1iscellaneous
increases in Trade service-cost, and in Coal products and Basic chemicals in the case
of a rise in Transportation and communication cost.
Some caution is required in the evaluation of Table 3 from the perspective of
cost-push effects.
realistic ones, because the constant input coefficients are predicated on the absence
of variation in relative prices.
substitution effects which tend to set limits on price rises of the cost-push type.
On the other hand, the recent rising trend in the service-input coefficients of
Japanese industries leads to an underestimate of the actual coefficient values of
Bl"
IV.
Int~~ona Comp~on
(1)
Input-output data
1959, Dutch 1959 and Belgian 1959 tables by the Statistical Office of European
Economic Community.
94
TABLE 6
INTERNAL MULTIPLIERS IN THE GOODS-PRODUCING SECTOR AND
LEVEL OF SERVICE ACTIVITIES
(1)
Category
Trade
Banking and Insurance
Real Estate
Transportation
Communication
Public Services
Other Services
D.0778
0.0130
0.0242
0.0490
0.0053
0.0135
0.0549
0.0496
0.0176
0.0000
0.0116
0.0072
0.0029
0.0324
Belgium
0.0456
0.0158
0.0000
0.0354
0.0081
0.0000
0.0185
Category
Country
France
Belgium
Trade
Banking and Insurance
Real Estate
Transportation
Communication
Public Services
Other Services
0.1526
0.0721
0.2719
0.2979
0.1242
0.1470
0.5461
0.2346} 0.2507
0.4507
0.1944 0.2320 0.3330 0.1501
0.2211
0.2841
0.1588
0.4244
0.6082
0.1868
0.2886
0.1150
0.1480
0.5108
0.0931
95
Of the over-all
values in the last line of Table 6-(1), that of the United States is distinctly high.
It totals 0.24, while values for the other countries are in the range of about 0.11
0.17.
Among these other countries, Japan and West Germany have relatively higher
Thus, the capacity of the industrial sector to induce service activity is
values.
Now, looking at
the table by service category, we find that the Trade category has a relatively high
value in almost all of the countries cited above, but, at the same time, it may be
worth noting that the Other Services category of the United States also has a significantly high value.
United States, have a significant effect upon the Other Services category as well as
on Trade.
Table 6-(2) tells us what sort of service activity has more influence on the
internal propagation of goods-producing activities, because the numerical values are
the sums of the coefficients of internal propagation in the goods-producing sector
induced by goods-input in the service sector, i.e. the column-sum of the coefficients
of B2 = BP l for each service sector.
Looking at the table by category, the values for Transportation are highest in
every country except for the United States. Thus transportation appears to have the
greatest capacity to induce goods-producing activities.
the highest value is found in the Other Service category, and this fact, together
with the above conclusions, suggests that the United States is a country which has
the most advanced "Service Economy".
the relatively high value of the internal multiplier of the goods-producing sector
in Japan (on the average, the value for Japan amounts to 2.298, while that of the
United States is 1.843 and that of West Germany is 1.732).
Japan's over-all value in the previous Table 6-(1) was not the highest because of the
relatively low service-input coefficients in the goods-producing sector (81) in
Japan.
to 7.3%, while that of the United States is 12.9% and that of West Germany is 9.3%.
96
TABLE 7
INTERNAL AND EXTERNAL MULTIPLIERS IN SERVICE SECTOR
(1 ) Internal Multiplier of Service Sector
a)
Trade
1.1801
Real Estate
Transportation
Communication
1.0873 1.0521
Public Services
Other Services
Category
b)
1.0655
Trade
1.1374 1. 1081
1. 3981
Real Estate
Transportation
1. 1816
Communication
Public Services
1. 1315
Other services
1 .0276 1.0175
* Figures in a) are calculated as the column sum values of the elements of the
matrix T, and figures in b) as row sum values of the elements of the same matrix.
** Table a) lists the names of industry g~v~ng the induced effects, and b)
lists the names of industry ~eceiv~ng the induced effects.
97
(2)
United
West
States Japan Germany France
Trade
1.0268
1.0202
1.0250
1.0121
1.0138
1.0253
1 .0159
1.0134
1.0248
1.0124
1 .0092
1. 0062
1.0157
1. 0066
Real Estate
1.0519
1.0339
1. 0271
1.0000
1 .0189
1.0355
1 .0117
Transportation
1.0501
1.0568
1 .0350
1.0339
1.0309
1.0416
1. 0289
Communication
1.0234
1.0379
1.0000
1 .0103
1 .0125
1.0150
1.0059
Public Services
1.0275
1.0245
1.0000
1.0000
1.0000
1.0000
1.0000
Other Services
1.0943
1.0467
1.0270
1 .0181
1 .0195
1.0270
1.0092
Category
b)
Trade
1.0718
1 .0705
1.0535
1 .0130
1 .0161
1.0507
1.0222
1 .0211
1.0557
1 .0140
1.0128
1.0343
1.0198
1 .0125
Real Estate
1.0379
1 .0011
1.0000
1.0000
1.0000
1.0000
1.0000
Transportation
1.0510
1.0710
1.0433
1.0313
1. 0315
1.0246
1 .0266
Communication
1.0090
1.0237
1 .0000
1.0050
1.0074
1.0130
1.0069
Public Services
1. 0226
1 .0014
1.0079
1.0009
1.0000
1.0056
1.0000
1.0740
1 .0215
1.0078
1.0206
1.0125
1.0464
1.0100
* Figures in a) are calculated as the column sum values of the elements of the
matrix K, and figures in b) as row sum values of the elements of the same matrix.
** Table a) lists the names of industry giving the induced effects, and b)
lists the names of industry ~ecelving the induced effects.
98
Focusing on the service sector of each country, we find that the sUb-matrixmultipliers B1 and B2 operate on that sector in an indirect manner. Of course, the
final propagation effect on the service sector itself may be shown by the value of
M or by the separate values of T and K, namely, the internal and external multipliers
= KT).
given in Table 7. These values reflect the power (or the sensitivity) of dispersion
of the service sector both internally and externally.
Table 7-(1) conveys the effects of internal propagation on the service sector
starting from service-inputs in the service sector itself.
for each category in that Table 7-(1)-a), it is apparent that the service sector of
the United States has the greatest internal propagation effects. The values for
Japan are of about the same order as those for the European countries.
Such internal
= 1.3250 on the average. Such is the manner in which the internal propagation
patterns together with the external repercussion patterns determine the characteristics of intersectora1 propagation in the service sector.
Among the round-about external effects in Table 7-(2)-a), the Transportation
category has the highest values in all countries except the United States.
Again,
the United States alone has its highest value in the Other Service category. This
fact reinforces our earlier conclusion that the United States of America has the
most advanced Service Economy from the point-of-view of the interaction of
goods-producing activities and service activities.
A comment is needed regarding intercountry comparisons using input-output data.
As international standards for calculating input-output tables have not yet been
established, inconsistency in the arrangement of data, especially of the service
99
sector, may lead to some estimation errors, making only rough international
comparisons possible.
resign ourselves to evaluating column sum or row sum values instead of investigating
the detailed cross-effects that are manifested by the elements of the matrices
themselves.
PART THREE
DUAL ECONOMIC STRUCTURE
CHAPTER 6
THE DUAL STRUCTURE OF THE JAPANESE ECONOMY AND ITS GROWTH PATTERN *
1.
IntJtoducti.oYL
In
Japan, however, pre-modern and modern branches are unified in a national economy,
whereas in Asia's underdeveloped countries they remain marked by the colonial
economy and the mono-culture economy.
exist between the modern and pre-modern branches, "pre-modern" industries will
probably have an oppotunity of prolonging their life and thus creating a valuable
Veveto~ng Eeono~e6,
170,
101
period for transition to "modern" operation. On the other hand, existing pre-modern
enterprises run little danger of being eliminated, since new enterprises usually
emerge in an industrial group which is entirely different from the current native
industry. This "dualistic state" could certainly be retained and utilized, but, as
Hirschman conceded, pre-modern branches will sooner or later succumb to the modern
production methods.
above-mentioned adaptation in utilizing the dualistic state develop, but the process
of adaptation in organizing complementary relations within the framework of the whole
national economy developed as well.
Differentials in modern and pre-modern branches, which are found in Asian
underdeveloped countries, produce a polarization involving high income and low
income. Moreover, these two branches have a strong tendency to coexist in a
heterogeneous and unincorporative form.
large modern
II.
1)
Schema
06
06
EYLteJtplU.6e-6
GC
= 8,3)
As is proved by many statistical analyses, the larger the scale of enterprise, the
higher the capital-output ratio (C), whereas the smaller the scale, the lower the
ratio.
Consequently, even in the case where medium and small enterprises would grow
102
at the same rate as large enterprises, the required capital accumulation ratio (s)
necessary for the realization of the growth rate (G) will be small because of the
low capital-output ratio, while on the other hand, the high capital-output ratio of
large enterprises makes the required capital accumulation ratio extremely large.
This means that large enterprises cannot meet the high required capital accumulation
ratio with retained earnings, even though they have a large amount of owned capital.
As a result, they must depend upon outside capital to a considerable extent.
Such a tendency is of special relevance in an economy where, as in Japan, the
ratio of owned capital to total capital is particularly low compared with the
international level. Moreover, the continued high rate of growth after the war has
strengthened this tendency. Large enterprises must now rely on outside funds to a
greater degree than medium and small enterprises.
the close connection between large enterprises and banks, and the consequent
concentration of bank loans and discounts in enterprises of larger scale. However,
there are some factors necessary for the realization of this motive.
It is a fact
that larger enterprises have a strong borrowing power as a result of their privileged
position in regard to capital accessibility. This capital accessibility depends,
after all, upon the power of owned capital in large enterprises. Generally speaking
the greater the owned capital, the better the credit rating, and large enterprises
enjoy a favourable position especially in regard to borrowing long-term funds.
Indeed, statistical data indicate that owned capital of large enterprises is greater
than medium and small enterprises not only in absolute amount, but also in the ratio
of owned-capital to working capital (the debit side in the balance sheet).
Even though large enterprises are thus able to actualize a high required
capital-accumulation ratio, the high capital-output ratio itself constitutes an
unfavourable condition.
relatively unfavourable, and also that the depreciation cost and interest charge are
high.
yo
= k, corresponding to Harrod's
103
worker,
capital intensity (that is, the amount of capital stock per worker).4)
In order to improve in large enterprises the relationship of the capital-output
ratio (0) and high labor productivity (y) which progresses at a greater rate than in
medium and small enterprises, production methods must be adopted so that capital
intensity (k) more than offsets the progress of (0), as indicated by the fundamental
equation of productivity.
In large
enterprises the adoption of high capital intensity means at the same time a high
accumulation of capital stock; it corresponds to capital concentration on the
financial side.
In sum, a high capital-output ratio in large enterprises has two aspects,
financial and material/technical, and these can be disposed in a schema of capital
concentration in larger enterprises (Figure 1).
Figure 1.
=s
Higher ratio of required
Concentration
- - funds
capita 1 accumul ati on
Fi nanci a1
... aspect
Two aspects
of capital
concentration
=k
h
. tt
Concentration of
Material
Hig er capital ln enSl y - - assets in kind .. aspect
a log k - b
4) If
labor, and
capital, then yo = f~ = ~ = k
104
2)
Looking at capital concentration from the technical aspect, what is the basic
support of the dual structure of the Japanese economy? Various economic, social,
institutional, and historical factors with different influences are at play.
If one
is omitted, the remaining factors are insufficient to give the full picture.
Although there is a real danger in going to extremes, let us concentrate on two
fundamental factors:
1.
unemployment, and 2.
However, it
105
has not taken into consideration the conditions of production which give large
enterprises the capacity to play higher wages, nor does it explain Japan's high rate
of economic growth and the permanence of the dual structure.
Differentials in
Between these
extremes, enterprises of the sizes 2,3,4, ... in order of capital intensity form a
convex curve of productivity moving from the lower left to the upper right.
As
per employee on the vertical axis, the amount is 100,000 in the smallest class and
300,000 in the largest, the difference being 3 times.
wages are correlated with capital intensity in the direct form (black points on the
5) See Miyohei Shinohara, [45], pp. 103
109.
106
TABLE 1
PRODUCTIVITY, CAPITAL INTENSITY, CAPITAL-OUTPUT RATIO AND
WAGE RATE BY SIZE OF FIRM (1957)
Size by
Number of
Employees
Number
of
Firms
Productivity
Value
added O/L
(thousand
yen per
employee)
CapitalOutput
Capital
Turnover Intensi ty Ratio
Wage Rate
(thousand
yen per
employee)
T/L
K/L
fI/L
1-
300,374
186
541
69
0.371
1.128
114
10-
29
77 ,644
289
904
78
0.270 0.086
136
30-
49
13,332
348
1,140
91
0.261
0.080
145
50-
99
8,460
420
1,392
120
0.285 0.086
157
100- 199
3,146
492
1 ,548
166
0.337 0.107
172
200- 299
981
564
1,716
209
0.371
0.122
187
300- 499
645
696
2,088
309
0.445 0.148
205
500- 999
441
780
2,328
408
0.523 0.175
230
9 1,000-1,999
222
922
2,886
589
0.639 0.204
259
10 2,000-4,999
135
1,078
2,872
687
0.669 0.245
301
5,000-9,999
46
866
2,393
558
0.729 0.233
287
28
897
2,643
651
0.727 0.245
329
405,424
516
1,560
289
0.560 0.185
194
11
12 10,000 or more
Total
Source:
Th~
dgta
ar~ tgk~n
EnteJtpWe.6), 1957.
Note : Manufacturing industry only.
unincorporated firms.
107
Figure 2.
I-.:j
320
160
C)
>
:;:;
u
-6o
T
L
140
= 2,038.0 log LK
(R = 0.983)
.9
- 2,982
.11
120
100
.=
,..
Q)
'"
SO
,of
:>
Q)
c::
~
'"
3:
--I
20
1
1
lY
,..'"
11
1"12- -
~.---.
_.---
'-~
"S
"S
li
c
n
.12
5 _--.6
a4 ..
'"o
~
""\J
160
,.."C1's
200
__ ,g..-012
40
"S
010
___
~6/---- Q
.. 746 8 log ! - 1,150
L
.
L
2 4 j6 5
(R = 0.987)
3
-:;:
240
'c..
-0
.10 2S0
<T
.....
<
120 .....
~
SO
~
t:-<
J~~----~O
9
40
C>
0r---'1~0---o2~0---o3~0---'4~0~-'5~0~-'6~0~~7rnO~0
~2 ~405 6
Capital Intensity K/L
E-i
10
--2
07
08
........
----__
09
010
:>< 0.2
.3
'-tTi2
2-4
.....o
-(ri1
-+->
'" 0.4
c::
-+->
'"
Co
-+->
.5,
0.6
'"
-+->
'g.
Source:
Note
O.S
108
straight dotted line), a clear linear correlation appears.
As shown by the
linear correlation formula indicated in the figure, in marginal terms, when the
differential in capital intensity increases by 100,000 as a result of an increase in
scale, wage differentials increase by 28,000 and more.
On the other hand, medium and small enterprises are forced to adopt labor-
intensive methods with a low technical level (or low capital intensity), due to
their weakness in regard to capital accessibility;
low wages, due to the pressure of an excess labor force and potential unemployment.
3)
PeJUnaJ1enc.e 06
For simplicity's
Wage rates of large and small enterprises are given on the vertical axis by
a
In this case, the production point of maximum profit rate in large enterprises
(obtained by drawing a tangent line from a to the production function f a ) is
in small enterprises
the actual line);
a.
a,
and
(curve of
of large and small enterprises (the slope of the tangent line) is supposed to be
equal; but even if differentials in profit rate are supposed, there is no change in
the situation.
If we suppose that, for some reason or another, wage differentials are narrow-
109
Figure 3.
...,
.~
::l
"0
c..
b'
b
O~---------------------------
Capital Intensity
point of small enterprises shifts from S to S', resulting in a decline in the profit rate (the slope of the tangent line).
under the new wage rate, to obtain the same rate of profits as in the past, there
is no other alternative but to adopt high-grade production techniques fi' and raise
the production point to B".
fi coincides with fa as all enterprises achieve an almost identical level of production, this level would coincide with the production function of the original
J. Robinson type. 6) The reason why J. Robinson succeeded in producing a productivity curve for the economy as a whole is due to the fact that she tacitly presupposed
a homogeneous economy where various differentials are almost negligible.
The actual
110
The first fundamental condition to be considered is the existence of differentials in capital accessibility.
cessibility, small enterprises relying on their own strength cannot raise their
capital intensity to a point corresponding to
~"
Under such circumstances, and though many more complex factors will be at work, in
substance there are four possibilities:
profit rate at point
point
~',
(2) remain at
or thereabout by hiring new cheap labor, and failing to narrow the wage dif-
ferentials;
(3) when the above two cases are impossible, small enterprises may
~"
But
in view of the pressure of excess supply of labor, as obtained for a long period
after the war, the survival of small enterprises at a low production point, possibility (2), can be said to have been the most probable case.
ever, points toward possibility (4).
are introduced into the large enterprises themselves which provoke the development
of the subcontracting system. The result is that, according to Figure 3, the shift
to the upper right of the production function in large enterprises f a precedes the
shift to the upper right of fb caused by the modernization of medium and small
enterprises.
111
population increase and the increasing trend of demand for labor due to capital
formation are favourable factors, and worthy of attention.
III.
1)
In Figure 3, capital accessibility related to the owned capital of the enterprise is presented as one of the shift parameters of the productivity curve fa' fb
Bas~d
long-term debt X2 (the amount per person based on the number of workers by size of
firm) is obtained, and amounts to X2
= 0.0667Xll.303.
debt to owned capital is 1.30. Elasticity greater than 1.00 means that, in accordance with the expansion of owned capital following the enlargement of size, longterm debts register a greater increase than owned capital.
owned capital rises by one per cent following enlargement of size, long-term debts
increase by 1.3 per cent.
owned capital indicates its degree of capital accessibility,7) and that the competitive position of a firm in the capital market is limited by the amount of owned
capital.
Since the size of owned capital is the fundamental factor for capital accessibility, the larger the amount of owned capital, the more capital-intensive methods
of production are adopted due to the realization of high productivity and inclination towards high capital accumulation.
7) This kind of view is also maintained by M. Kalecki [25], pp. 91-95, and
J. Steindl [49], pp. 40 ff.
112
TABLE 2
DIFFERENTIALS OF CAPITAL INTENSITY, OWNED CAPITAL AND
LONG-TERM BORROWINGS BY SIZE OF FIRM
Size of Firm
Long-term Capital
(total assets) per Employee
( million)
Xl + X2
Owned Capi ta 1
per Employee
Xl
Long-term
Borrowing
per Employee
X2
Capi ta 1 I nten si ty
(tangible fixed
assets per
employee)
0-
70.2
65.6
4.6
58.7
2-
68.3
60.2
8.1
60.2
5-
10
95.7
83.9
11.8
102.0
10-
30
167.7
143.2
24.5
142.6
30-
50
186.0
121.0
65.0
182.2
50-
100
226.9
188.8
38.1
186.0
100-
500
459.7
375,8
85.2
334.8
500- 1,000
640.7
425.8
214.9
533.0
1,000- 5,000
1,014.8
685.7
329.1
739.9
5,000-10,000
1,589.2
1 ,186.6
402.6
1,018.6
1,316.7
1,015.3
301.4
988.9
708.0
529.9
178.1
525.3
10,000Average
Source:
Note
113
Nevertheless, capital
For instance, Japanese enterprises manifest a strenuous drive to attain the advanced technical levels of developed countries.
cause is the fact that the price of capital (interest rate) is relatively cheap for
large enterprises.
tion of 5 million and less bore an average interest rate of 17 per cent, whilst
large enterprises with a capitalization of 100 million and over used borrowed funds
bearing the relatively low average interest rate of 11 per cent as shown in Table 3.
TABLE 3
AVERAGE LEVEL OF INTEREST RATES ON BORROWINGS BY SIZE OF FIRM
Size classified by paid-in capital -(unit:
Years
per cent)
-2
million
2-5
million
5-10
million
10-50
mill ion
50-100
mill ion
100
mill ion
1956
15.36
14.52
14.28
14.19
13.35
12.24
1957
12.79
15.11
14.40
14.79
12.59
10.23
1958
17.38
17 .80
16.49
13.84
13.62
11.15
Source:
Note:
114
to the solid line curve I in the centre. The imputed cost of funds is measured on
the vertical axis. On the horizontal axis, total funds employed are measured, and
are considered to have been put in the order of advantageous sources of investment
funds, namely (a)
Figure 4.
VI
<+-"g
o :::s
of.>LI...
VI
"0
Q)
of.>
:::s
0-
....S
1.
Since internal funds may be used freely by the enterprise, their investment
internal investment of these funds means the sacrifice of such external earnings, a
so-called opportunity cost.
OA, the accumulation would be made with nearly perfect elasticity to its opportunity
cost.
2.
raised through borrowings from financial institutions and the issue of debentures
is accompanied by a cash cost in terms of .interest payments, as well as imputed
costs. This brings about the rise in cost per unit of funds raised up to the point
B.
Real interest rates (cash cost plus imputed cost) rise with the increase in the
115
sources of funds, because of the expenses for issuing, the care taken to protect the
market prices of the existing stock, the disadvantages as to taxation, etc.
However,
as long as enterprises accept this high cost, the raising of funds through the issue
of equities would not be so inelastic as in the case of borrowed funds; it may even
be considered as quite elastic. The shape of the curve I on the right side of point
B represents this fact.
This is the graph of the cost schedule for investment funds as shown by J.
Dusenberry.8)
because the cost schedule for investment funds shows a great difference according to
sizes of enterprise.
Going back to Figure 4, in medium and small enterprises, owned capital is small
in absolute figures; therefore, as indicated by the broken line lIon the left side,
the gradual increase begins early.
of funds through the issue of stock and debentures runs into prohibitive
difficulties, due to peculiarities of the Japanese capital market.
Consequently,
the cost schedule for investment funds II ends by being entirely inelastic.
The cost schedule for investment funds of large enterprises is represented by
the broken-line curve IlIon the right side of Figure 4. The amount of internal
funds and the slope of the upward curve are not independent of one another.
It may
be said that the larger the internal funds, the slower the slope of the upward
curve, because, owing to the capital power of large enterprises, borrowed funds can
be raised at lower cost.
116
At any rate, it
is clear from Figure 4 that the difference between large and small enterprises in
the cost schedule for investment funds causes a marked disparity in the average cost
of raising funds per unit of total capital employed.
rates are paid by small enterprises, and relatively lower rated by large enterprises.
In Japan, an almost institutionalized relationship exists between the different
sizes of enterprise and various types of financial institutions in accordance with
the capital accessibility of the enterprise.
This Figure may be called the x-type intersection of borrowed funds of enterprises by size of firm.
horizontal axis, and ratios of borrowed funds by lenders to total borrowed funds on
the vertical axis. The ratio a (city banks) can be considered as an indicator of
the borrowing power of enterprises in each size group:
it increases regularly as
the size of the enterprise becomes larger; it declines a little at the point of the
largest size, but if borrowed funds from long-term credit banks and trust banks are
added (a'), it shows a smooth upward line.
Ratio b (funds borrowed from customers) can be considered as an indicator
reflecting in part the subcontracting relationship. The curve is high in the case
of medium firms as a reflection of the tendency of medium and small enterprises to
come under the control of large ones.
relatives, and acquaintances) and ratio d (funds borrowed from various medium and
small financial institutions) shows a smooth downward line. The weak borrowing
power of medium and small enterprises is manifested by their high degree of dependence on these small financial institutions. The x-type intersection of lines a and
d
is a clear reflection of the dual structure viewed from the financial angle.
In
other words, small enterprises survive by depending for a considerable part of their
funds on money-lenders, customers, relatives and acquaintances, who can be termed
"marginal suppliers of funds." On the other hand, large enterprises subsist in
dependence on the role of the Bank of Japan as a "marginal supplier of funds,"
namely by its advances through the intermediary of city banks to the extent
corresponding to the firms' liquidity position.
117
Figure 5.
%
100
a'
a
50
b ............
00
"''---...
--..... __ .. __
',-
_-
10
11 12
Size of Firm
Source:
Notes:
Same as Figure 2.
1. The size of enterprises on the horizontal axis is measured by the
number of employees, increasing from 1 (l-lO employees) to 12
(lO,OOO and more employees).
.
2. This chart shows the ratio of loans from each lending institution
to total loans:
a - city banks
a'- city banks plus long-term credit banks and trust banks
b - customers
a - b plus money-lenders, relatives, and acquaintances
d - a plus financial institutions for medium and small enterprises.
3)
118
p.a. for city banks to 12.47 per cent p.a. for credit associations. These are
averages, of course; rates vary also according to borrowers.
Large enterprises are able to select the lender banks, which is then forced to
put up with interest rates at nearly "competitive prices," whilst for medium and
small enterprises lenders are in a monopolistic position, selecting borrowers and
charging interest at "monopolistic prices."
"equilibrium interest rate" which equates with supply and demand of total funds of
all financial institutions, banks as a whole would extend loans to large enterprises
at lower interest rates than the equilibrium rate, and make up the deficits thus
incurred by higher rates on loans to medium and small enterprises.
However, as
regards loans to medium and small enterprises, there is an economic law that the
cost to an individual financial institution of making a loan is higher when the risk
is greater and the amount smaller.
TABLE 4
DIFFERENTIALS IN AVERAGE RATES OF INTEREST BY TYPE OF LENDING INSTITUTIONS (1957)
City banks
Local banks
Long-term credit banks
Trust banks
Mutual loans &savings banks
Credit associations
Loans
%p.a.
Discounts
%p.a.
7.98
8.54
9.41
8.03
10.75
12.47
8.42
9.10
7.87
8.11
10.40
12.47
St~tiC6
06 Japan),
than the average rate of interest on loans in the case of city banks, local banks,
and trust banks.
119
follows.
these loans are extended at relatively low interest rates, whilst as to discounts,
the weight of medium and small enterprises is high, and these discounts are made at
relatively high interest rates.
general average. Thus, large banks are able to extend loans to large enterprises at
relatively low interest rates, because of the high interest rates on loans to medium
and small enterprises.
offering only short-term loans to medium and small enterprises. On the other hand,
the average rate of interest in long-term credit banks, mutual loans and savings
banks, and credit associations is higher for loans than for discounts, as textbooks
usually maintain. The reason is that customers of these financial institutions are
limited mainly to either larger enterprises (in case of long-term credit banks) and
medium and small enterprises (in case of mutual loans and savings banks and credit
associations).
Thus, loans of long-term credit banks and others to large enterprises form one
pole, and loans of small financial institutions to medium and small enterprises
another; in the middle, discriminative loans of city banks and local banks to large
and small enterprises produce the above-mentioned reverse phenomenon. This
situation can be ascertained by the difference in the distribution pattern of loans
by various types of financial institutions.
Figure 6 shows the distribution of loans to different sizes of enterprise by
various types of financial institutions, based on data used for Figure 5. The curve
indicated "average" is a cumulative frequency curve for total loans of all financial
institutions, including small financial institutions such as money-lenders and
government financial institutions, which are not listed in the Figure. The uneven
downward development indicates that the distribution of funds as a whole is
unequ~l.
Since in the survey method loans of long-term credit banks and trust banks
cannot be separated, it is regretted that Figure 6 is inconsistent with the data of
Table 4.
However, it appears that the curves of city banks and of local banks are
located between the most uneven curve of long-term credit banks and trust banks
inclining towards large enterprises and the curve of financial institutions for
120
Figure 6.
100r----------------------------+--------~
50
/~
----+_
0~~~~==~
Long-term Credit
&Trust Banks
Size of Firm
Source: Same as Figure 2.
Note
The vertical axis indicates the cumulative frequency curve, and the
horizontal axis the size of enterprises by the number of employees.
medium and small enterprises (mutual loans & saving banks, credit associations,
credit co-operatives, etc.).
121
which an individual enterprise faces in the factor markets.
In Figure 3, a
On the other
III
....,
OJ
OJ
~
.J:l
.~
0>
'"
III
'"
III
-c
OJ
<: X
.~
...., 4-
.~
0.
'"
Source:
Note
122
Starting from the most labor-intensive combination 1 (enterprise with less than
2 million assets), various combinations 2, 3, 4 ... are determined up to the
highest capital-intensive combination 11.
acting under the principle of minimum expenses with a production curve identical to
the observed iso-quant curve, the ratio at the tangent line to the various production points on the curve should indicate relative prices of capital and labor. The
textbook argument would be that the greater the slope of the tangent line, the
smaller the capital expenses (interest rates), and the more advantageous it is to
replace labor by capital, and vice versa.
Figure 7 is, to the end, an
ob~e4ved
~chedute
curve.
following:
schedules, and the contact points of these respective iso-quant curves and the price
lines of each size of enterprise generate the observed iso-quant curve shown in
Figure 7. This interpretation is identical to that of the observed productivity
curve illustrated in Figure 2.
Since measurement of the schedule iso-quant curves is difficult, the structure
of the ratio of labor and capital prices by size of firm must be obtained by other
means. Table 5 shows that the differentials in the average rate of interest on
borrowed funds (see Table 3) can be converted into an index number taking the
interest rate of the smallest enterprises as 100. The same can be done for the
differentials in wages. 10 ) The ratio of both indices is given as the difference in
g) Such measurement has been tried: the Douglas type production function was
measured from the basic data of Figure 7, and the condition of minimum expenses
added. Then the values of differentials in interest rates were arrived at by
substituting the values of differentials in wages obtained from data using the
minimization equation. However, the values thus obtained could not be judged
significant compared with the actual ones.
10) The differentials in wages are obrained from the Corporate Enterprise Statistics
cited in Table 3.
123
relative prices.
TABLE 5
DISPARITY OF RELATIVE PRICES OF WAGES AND INTEREST RATES BY SIZE OF FIRM
Size of Finn
(paid-in capital)
Differentials in
Wages
( mill ion)
(l,OOO)
(1)
- 2
2- 5
5- 10
10- 50
50-100
100-
139
172
173
200
231
348
100.0
123.5
124.5
143.5
165.9
249.9
(2)
(1)
Differentials in the
Average Rate of
Interest
(%)
(2)
17.4
17.8
16.5
13.8
13.6
10.2
Differentials in the
Ratio of Wages and
Interest Rate
(3 )
100.0
102.3
94.8
79.3
78.2
64.4
1.000
0.828
0.761
0.553
0.471
0.258
with Figure 7, it may be supposed that the price line of the ratio of interest rates
and wages (as the reciprocal) grows steeper from small to large enterprises.
Different in this from wage differentials, differentials in interest rates are
also common in other advanced countries, because of the risk connected with the
borrower.
A fairly
evident type of combination is found between the different sizes of enterprise and
various types of financial institutions.
124
considerably and directly the formation of the dual structure.
disparity in relative prices of interest rates and wages (see Table 5) is fairly
large, and it may be concluded that it contributes to the further widening of
differentials in capital intensity.
The analysis of factor ratios in terms of relative prices is a static endeavor.
There are also dynamic factors causing differentials in prices and in capital
intensity.
2)
Returning again to general points of view, one aspect has remained untouched in
the above analysis.
capital concentration in a
capital - short economy, the stimul us of the i nternati ona 1 envi ronment, and the
co-existence of large and petty capital.
1.
Existing capital is
As often
pointed out, shortage of capital has been one of the fundamental factors restricting
the development of the Japanese economy.
the Japanese money and credit situation, finds its fundamental cause in the shortage
of capital. Thus, the rationale for financial institutions is established, and an
institutional background is provided for differentials in interest rates related to
credit-standing of the borrower.
125
2.
If low wages are due to the pressure of excess supply of labor, the
Nonetheless,
differentials in interest rates to the advantage of large enterprises exist, and are
a reason for them to adopt high capital intensity. This fact alone does not explain,
however, the existing marked differentials in capital intensity. Also important is
a strong expansion mood and an active inclination towards investments, which tend to
make up for the shortage of capital and which are stimulated by the international
environment in which the Japanese economy has to catch up rapidly with the technical
level of developed countries. This peculiarity is supported in turn by the combination of large banks and large holdings of capital through loans to related
enterprises; differentials in interest rate advantageous to large enterprises can be
considered as cause or effect.
suppliers of funds" can offer medium and small enterprises. The higher interest
rate, due to the greater risk, is a disadvantage compensated by cheap labor. A
last factor would be the high weight of "trade credit" in the composition of the
total funds of medium and small enterprises, which have such recourse to bills and
126
accounts payab1e. 11 )
V.
Conc1.!L6..(.on
In Japan, differentials in wages and interest rates, manifested by the utili'zation of relatively cheap labor in medium and small enterprises, and relatively low
interest rates for large enterprises have solidified the dual structure of the
Japanese economy. An anticipated slowing-down of the growth in the labor supply,
the i ncreas i ng trE!nd of demand for 1abor due to capi ta 1 formati on, and the promotion
of foreign trade liberalization are putting pressure on the pre-modern sectors.
These facts have started a trend towards the abolition of the dual structure.
It
appears imminent that systematization and reorganization of medium and small enterprises will be pushed.
stratum to a middle stratum and from a middle stratum to a low stratum, forming a
"continuous differential structure.,,12) The concept of Japan's "dual structure"
must, therefore, be clearly distinguished from the "dualism" found in Asian
underdeveloped countries.
Limiting ourselves to economic factors, the following points are of importance:
1. Duality may characterize the initial stage of development, and be limited
to the formation and utilization of the dualistic development explained by Hirschman,
namely the polarized co-existence of modern and pre-modern branches. However, after
the "take-off," described by Rostow1 3) and especially in the case of rapid progress,
pre-modern branches are to be combined with modern branches in a complementary
fashion.
127
and labor resources different from that of developed countries is clearly reflected
in the fact that modern production methods are shut out from various branches of
commerce and industry.
e~ting
enterprises is said to be high, the level is still lower than in developed countries.
Therefore, these enterprises use a system whereby they complement a productivity
relatively lower than the international level by low wages in subcontracting medium
and small enterprises.
Until the end of the 1950's (or the beginning of the 1960's) the Japanese
economy was characterized by excess supply of labor, and wages in the pre-modern
small enterprises tended to be given by the low level but with some upward trend and
128
cyclical fluctuations.
1960's, the demand for labor had an increasing trend due to rapid capital formation
and technological progress, and thus decreasing the wage differentials.
One of the
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133
INDEX
Advertising, effects of
Ara, K. i i
Artie, R. 75, 129
Employment:
--- expansion in service sector
79, 82
--- requirements 55
Enlarged inverse matrix multipl ier
5, 50
Expenditure of national income 2
External funds 114
External multipl ier 61, 88
--- of regions 66
--- of service sector 91, 98
local ized --- 72
80
Barna, 1. 129
Bhalla, A. S. 76, 79, 129
Borrowed funds, structure of
Branson, W. H. 10, 129
Brown, A. I3 I
116
Cao-Pinna, V. 129
Capital:
--- accessibi I ity I I I
--- accumulation 102
concentration 103, 124
--- intensity 105, 120
--- requirements 55
Capital-labor ratio ~ee Capital
intensity
Capital-output ratio 102
Chenery, H. B. 37, 65, 74 129
Chipman, J. S. 129
'
Circular flow of intermediate
products 44
Clark, C. 79, 129
Clark, P. G. 74, 129
Cobb-Douglas formula 105
Consumption I
--- function 4, 50
--- multipl ier 32
Convergence conditions 18
Cost-push, of service-prices 91
Cost schedule of investment funds
Debreu, G. 129
Decomposabi I ity 17, 19
Dependence effects 80
Differentials 101
in capital intensity 105, 121
in funds 113, 119
in interest rates 113 117, 123
in productivity 105 '
in wages 104, 120
Direct and indirect requirements 37,55
Distribution of income:
general ized pattern of --- 4
regional --- 29
Distribution of loans 119
Dual structure 108, 126
Dua Ii sm 100
Dusenberry, J. S. 115, 129
Economic growth
~ee
Growth
101
134
Masegi,S. 1,43,131
Material-coefficients 47
Matrix multipl ier:
--- of income formation 9
--- of output determination ~ee
Inverse matrix
Meaningful solutions, existence of 14
Medium and sma I I enterprises 101, 110,
116
Miyazawa, K. I, 13, 75, 130, 131
Morgenstern, O. 131
Moses, L. N. 37, 65, I31
MPS <material product system) 77
Multi-sector income multipl ier 9
National economic accounting
systems 76
Non-negative matrix 15
Ohkawa, K. 126, 131
Open economy:
--- and input-output model 43
fundamental equation of --- 47
Output multipl ier:
enlarged --- 5
macrocosmic --- 2
partitioned --- 62
regional --- 37
standard --- 4
Owned capital 102, III
Partition off matrices 60, 71
Patrick, H. T. 76
Permutation 18
Pre-modern industries 100
Price formation 92
Production function 108, 122
Productive labor 76
Productivity:
curve 108
--- differentials 105
--- of service 80
fundamental equation of
102
Propagation process:
intersectoral --- 61, 72
structure of --- 12, 46, 56, 78
Propensity to consume domestic
goods 46
Rasmussen, P. N. 131
Regional concentration of incomes 28
Regional income multipl ier 23
Regional model ~ee Interregional model
Relative prices of factors 122
Repercussion process ~ee Propagation
process
Rob i nson, J. 109, 131
Rostow, W. W. I26, I31
Sato, R.
ii
135
regional --- 68
Sub-multipl ier process 44
leakage coefficients of --Suzawa, G. iii
45
Take-off 126
Technical innovation 110
Tertiary sectors ~ee Service
Trade activity 95
Traditional sector ~ee Pre-modern
industries
Transfer of income, between goods and
service sectors 81
Transportation 95
Truncated multipl ier 14
Unproductive labor
Value-added:
mu Itip I i er
ratio 4
sector 10
76
51
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