INPUT OUTPUT MULTIPLIERS
The ABS frequently receives requests from users who are seeking updated Input–Output (I–O) multipliers. The ABS has not published I–O multipliers since the 1998–99 issue of our product Australian National Accounts: Input–Output Tables (cat. no. 5209.0.55.001) and does not plan to compile and reissue this table. As such, the ABS is unable to support user requests for assistance with multipliers.
Production of multipliers was discontinued with the 2001–02 issue for several reasons. There was considerable debate in the user community as to their suitability for the purposes to which they were most commonly applied, that is, to produce measures of the size and impact of a particular project to support bids for industry assistance of various forms.
LIMITATIONS OF INPUT–OUTPUT MULTIPLIERS FOR ECONOMIC IMPACT ASSESSMENT
I–O multipliers are most commonly used to quantify the economic impacts (both direct and indirect) relating to policies and projects. While their ease of use makes I–O multipliers a popular tool for economic impact analysis, they are based on limiting assumptions that results in multipliers being a biased estimator of the benefits or costs of a project.
Inherent shortcomings and limitations of multipliers for economic impact analysis include:
- Lack of supply–side constraints: The most significant limitation of economic impact analysis using multipliers is the implicit assumption that the economy has no supply–side constraints. That is, it is assumed that extra output can be produced in one area without taking resources away from other activities, thus overstating economic impacts. The actual impact is likely to be dependent on the extent to which the economy is operating at or near capacity.
- Fixed prices: Constraints on the availability of inputs, such as skilled labour, require prices to act as a rationing device. In assessments using multipliers, where factors of production are assumed to be limitless, this rationing response is assumed not to occur. Prices are assumed to be unaffected by policy and any crowding out effects are not captured.
- Fixed ratios for intermediate inputs and production: Economic impact analysis using multipliers implicitly assumes that there is a fixed input structure in each industry and fixed ratios for production. As such, impact analysis using multipliers can be seen to describe average effects, not marginal effects. For example, increased demand for a product is assumed to imply an equal increase in production for that product. In reality, however, it may be more efficient to increase imports or divert some exports to local consumption rather than increasing local production by the full amount;
- No allowance for purchasers’ marginal responses to change: Economic impact analysis using multipliers assumes that households consume goods and services in exact proportions to their initial budget shares. For example, the household budget share of some goods might increase as household income increases. This equally applies to industrial consumption of intermediate inputs and factors of production.
- Absence of budget constraints: Assessments of economic impacts using multipliers that consider consumption induced effects (type two multipliers) implicitly assume that household and government consumption is not subject to budget constraints.
- Not applicable for small regions: Multipliers that have been calculated from the national I–O table are not appropriate for use in economic impact analysis of projects in small regions. For small regions multipliers tend to be smaller than national multipliers since their inter–industry linkages are normally relatively shallow. Inter–industry linkages tend to be shallow in small regions since they usually don’t have the capacity to produce the wide range of goods used for inputs and consumption, instead importing a large proportion of these goods from other regions.
I–O multipliers represent one particular derived or modelled view of I–O data that goes beyond the publishing of the core I–O tables. In light of this, the ABS no longer produces multipliers as an extension of our I–O tables. Instead, users of the I–O tables can compile their own multipliers as they see fit, using their own methods and assumptions to suit their own needs from the data supplied in the main I–O tables.
While I–O multipliers may be useful as summary statistics to assist in understanding the degree to which an industry is integrated into the economy, their inherent shortcomings make them inappropriate for economic impact analysis. These shortcomings mean that I–O multipliers are likely to significantly over–state the impacts of projects or events. More complex methodologies, such as those inherent in Computable General Equilibrium (CGE) models, are required to overcome these shortcomings.
Further discussion of the use of I–O multipliers can be found in the following references:
Australian Capital Territory. Auditor-General's Office 2002, V8 car races in Canberra : costs and benefits, ACT Auditor-General's Office, Canberra.
Western Australia. Department of Treasury and Finance, March 2002, Economic Research Articles: The Use and Abuse of Input–Output Multipliers, Department of Treasury and Finance, Perth.
Dixon, P. et al. 1991, Notes and Problems in Applied General Equilibrium Economics, North-Holland, Amsterdam; New York, N.Y page 65.
Australia. Industries Assistance Commission 1989, Using input-output analysis and multipliers, [The Commission], Canberra.
Queensland Treasury, Office of Economic and Statistical Research, 2006, Overview of Some Alternative Methodologies for Economic Impact Analysis, Queensland Treasury, Brisbane.