Page 51 - Special Topic Session (STS) - Volume 2

STS452 Joseph M.
service). The territorial apportionment of the benefits of productive activity is
primarily determined by the origin of the components. In this regard, statistics
on a territory’s actual contribution to the production of a commodity is
essential for economic analysis and policy-making. Such granularity in data
becomes even more significant as countries seek economic growth by
expanding the market for their products beyond their territorial boundaries.
Extending the decomposition by origin to product and sector levels will further
enhance the analytical utility of the information. Further, standard trade
statistics do not readily facilitate the measurement of an economy’s
involvement in globalized production processes. For example, an economy
whose sole export is a basic low-valued, yet key, component of a commodity
assembled primarily in and shipped globally from another economy would not
be discerned as highly integrated into the global market through traditional
measures. Nonetheless, the value of the work done in the economy producing
the key component (its “value added”) is intrinsic in the commodity. The
criticality of the economy, and its sector producing the key component, in the
production process of the commodity is concealed in standard measures.
Likewise, the contributions of other local sectors that support the exporting
sector are also not apparent. Traditional approaches do not support a
mechanism for tracing the path of a value added from its initial creation to
final consumption. Only the economic input–output analysis framework
provides such a facility.

2. Studying production and trade through an IO analysis framework
Figure 3.1 depicts an elementary open economy in IOT form at a given
point in time. There are three principal matrices: intermediate use, final use,
and value added. The total output, or supply, by industrial sector is provided
in the row vector and the total demand by industrial sector is given in the
column vector, which are also the row and column sums, respectively, of the
system of matrices. The economy has three industrial sectors (i, j = 1, 2, 3), two
final use domestic sectors (e.g., households), and the rest of the world (ROW).
The intermediate use matrix records bilateral and bisectoral transactions in
intermediates, which are commodities used in the production of other
commodities. The value added matrix details the shares of labor
(compensation), capital (interest and depreciation), entrepreneurial effort
(operating surplus or profit), and government (production and commodity
taxes and subsidies) in a given sector’s output. The sectors produce
differentiable commodities valued Xj. Assume that sector 1 of the domestic
economy imports an intermediate commodity valued M1, transforms or
enhances it using domestic labor valued V1, and produces output valued X1.
Sector 2 uses sector 1’s output as input in its production process, employing
labor valued V2 to produce output valued X2, which, in turn, becomes the input

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