Regional Multipliers Essay

Standard Keynesian expression:
Y=C+I+G+X-M
The Keynesian income-expenditure model considers the relationship between these expenditures and current real national income. Aggregate expenditures on investment, I, government, G, and net exports, NX, are typically regarded as autonomous or independent of current income. The exception is aggregate expenditures on consumption. Keynes argues that aggregate consumption expenditures are determined primarily by current real national income. He suggests that aggregate consumption expenditures can be summarized by the equation
C= Co+ c(Y-tY)
M=Mo+ m(Y-tY)
Regional I, G & X are assumed to be exogenous
Substituting:
Y=Co+I+G+X+Mo1-c-m(1-t)
Letting k (regional multiplier) k=11-c-m(1-t)
Y=k(Co+I+G+X=Mo)

k is dependent on the value of the term (c-m) –marginal propensity to consume locally produced goods
-As (c-m) increase- k increase
-And vise versa * Regions with few local suppliers have a high m-(c-m) is low & k is low * Regions with strong interfirm linkages have low m-(c-m) is high &k is high

* Factors affecting (c-m): * 1. A region’s size * 2. A region’s industry mix * 3. A region’s location * Estimates of k are region-specific (Size of k varies according to the characteristics of the region)

Extentions of the Keynesian model

1. Allowing I to be partly expgenous
-partly dependant on national economic conditions & partly on Y
2. Allowing G to be partly exogenous
- public expenditure is partly an inverse ftion on regional Y
Substituting:

k=11-c-m+i-g*(1-t)

(i-g)- marginal propensity to invest in the local economy
First round leakages:
An Injection triggers the regional multipliers effect & causes subsequent other injections.
Initial injection is usually large relative to the second & subsequent rounds of expenditure. ( when income increases, injections are increasing, but also leakages increase).
However, leakages from the first round may be very large relative to the size of initial injection.
It is important to know how much of the initial I stays in the region.
Limitations:
1. Assumes thre are no local factor supply constraints * If capacity constraints exists, an Injection may have little effect on Y. 2. The model fails to allow for inter-regional feedback effects. Only an issue for regions that are relatively large. 3. Timing of income changes resulting from expenditure injections is usually ignored. ( It doesn‘t say anything about the time how long it takes for injection to hit the economy. 4. Does not show how the I affects individual industries 5. Focuses on real variables; e.g. income & output money are assumed to be neutral.

Input-output model * An Input-Output model is a mathematical description of how all sectors of an economy are related. ( Coughlin and Mandelbaum, 1991) * Identifies flows of expenditure between industries, consumers & suppliers Tells where each industry’s output goes to & where it’s inputs from ln constructing an input-output model, one begins by separating economic activity in a region (any geographic area, such as a country, state or metropolis) into a number of producing sectors. for example, manufacturing, services, agriculture, etc. The value of products flowing from each sector as a producer to each sector as a purchaser provides the essential information for a model. An industry’s demand for inputs from other industries is related closely to its own level of output. Indeed, input output models assume that, for each industry in the region, there is a constant relationship between the value of its output and the value of inputs it purchases from all other industries in the region. In contrast, these models make no explicit assumption about the relationship between the value of the output and purchases of inputs of groups other than the region’s industrial firms. The demand of these external

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