North East Regional Economic Model( NEEM) Overview and Training Session

1. North East Regional Economic Model( NEEM)Overview and Training Session 5. Scenario building and multipliers 24 June 2008 North East Economic Model. Overview and training session

2. Scenario building • Simple scenarios involve scaling of all or part of the table, thus assuming • Leontief-type production functions • no input substitution (right angle isoquants) • No changes in technology • Marginal spending patterns by sectors are equal to average spending patterns • Perfectly elastic supply of inputs (and hence output) - real prices are unresponsive to demand changes. • usually implies no capacity constraints 24 June 2008 North East Economic Model. Overview and training session

3. Production Rises New employees taken on A portion are saved, spent on imports or spent in taxation (MPL = MPS+MPM+MPT) A portion of wages are spent (MPC) Wage payments rise The Multiplier The total effect on the economy of a change in one of the final demand sectors New investment 24 June 2008 North East Economic Model. Overview and training session

4. Impact analysis 1 New production activity Demand for Labour Demand for other inputs Previously unemployed Workers in other industries In-migrants Commuters Demand for goods and services Locally produced goods and services Imports into region

5. First round leakages Initial injection Imports into region, taxes on additional expenditure, etc Increase in regional output, wages, profits etc. Indirect and induced expenditure within region Taxes, NI, retained earnings, etc Increase in disposable income Savings of residents, earnings to residents from other regions

6. Impact analysis - a new plant • Primary effect • Direct effect: The income and employment arising at the new plant • Secondary effects • Indirect effect: The income and employment arising out of the plants demand for inputs • Induced effect: The income and employment arising as increases in income are spent within the local economy 24 June 2008 North East Economic Model. Overview and training session

7. The Multiplier Numerical Example 1 Assume MPC=0.9 & MPL=0.1 D D Y L Initial Change 200 Cycle 1 180 20 Cycle 2 162 18 Cycle 3 145 16 Total 2000 200 24 June 2008 North East Economic Model. Overview and training session

8. Multiplier = Total change in national income Initial change in national income Multiplier = 2000 = 10 200 Multiplier = 1 Multiplier = 1 = 10 MPL 0.1 The Multiplier Numerical Example 2 24 June 2008 North East Economic Model. Overview and training session

9. Simple regional multiplier

11. Input-output multipliers • Conceptually similar to the ‘simple multiplier’, but • An equation for each industry • Supply chains and intermediate production are included • Households have several spending functions (c.f. just an average propensity to consume) • etc 24 June 2008 North East Economic Model. Overview and training session

12. Iterating the Table 1 • Calculating technical coefficients • Manuf buys £40 of inputs from agriculture • Manuf’s total gross inputs equal £200 • General formula - technical coefficient • Where: i=row number, j=column number • X=gross outlay 24 June 2008 North East Economic Model. Overview and training session

13. Iterating the Table 2 • The technical coefficients tell us the size of the first round or direct & indirect effects of any shock • We also need the higher round effects • Manufacturing expands (exogenous reason) • It demand inputs from • Manufacturing • Services • agriculture • … other firms expand and demand inputs, consumer spending rises. 24 June 2008 North East Economic Model. Overview and training session

14. Iterating the Table 3 • These higher round effects can be summed and added to the first round effect to give the total effect on all sectors of the initial shock • This can be done efficiently on a computer using matrix algebra techniques, allowing production of multipliers for every industry 24 June 2008 North East Economic Model. Overview and training session

15. Rest of UK Sub-regional breakdowns Trade Rest of World (inc. breakdowns) North East industrial sectors - production & sales Industrial clusters Government (local and central) Households (regional population) Capital investment Qualifications Occupations Schematic diagram 24 June 2008 North East Economic Model. Overview and training session

16. Each of these tables is a large matrix containing various pieces of information. The ‘NE Domestic Matrix’ contains over 21,000 cells … Goods and Services within the North East Economy = Locally produced + Imports from the rest of the UK + Imports from overseas

17. Goods and Services within the North East Economy = Locally produced + The ‘wages’ element of the intermediate matrix maps to ‘social accounting matrices’. Imports from overseas + Imports from the rest of the UK

18. Incomes by sector and occupation (25x111) FTEs by industry and occupation (25x111) Headcounts by FT, PT & self employed by sector (3x111) FTEs by industry and qualification (7x111) Wage costs etc.