Multisector Models and Sectoral Projections
A much more sophisticated approach to development planning is to use some
variant of the interindustry or input-output model, in which the activities of
the major industrial sectors of the economy are interrelated by means of a set
of simultaneous algebraic equations expressing the specific production
processes or technologies of each industry. All industries are viewed both as
producers of outputs and users of inputs from other industries. For example,
the agricultural sector is both a producer of output (e.g., wheat) and a user of
inputs from, say, the manufacturing sector (e.g., machinery, fertilizer). Thus
direct and indirect repercussions of planned changes in the demand for the
products of any one industry on output, employment, and imports of all other
industries can be traced throughout the entire economy in an intricate web of
economic interdependence. Given the planned output targets for each sector
of the economy, the interindustry model can be used to determine intermediate
material, import, labor, and capital requirements with the result that a
comprehensive economic plan with mutually consistent production levels and
resource requirements can, in theory, be constructed.
Interindustry models range from simple input-output models, usually consisting
of 10 to 30 sectors in the developing economies and 30 to 400 sectors in
advanced economies, to more complicated linear programming or activity
analysis models where checks of feasibility (what is possible given certain resource
constraints) and optimality (what is best among different alternatives)
are also built into the model. But the distinguishing characteristic of the interindustry
or input-output approach is the attempt to formulate an internally
consistent, comprehensive development plan for the entire economy.9
Input-output analysis is often extended in two ways. First, by including
data on factor payments, sources of household income, and the pattern of
household goods consumption across various social groups (such as urban
and rural households), a social accounting matrix (SAM) is created. This is accomplished
by adding data from the system of national accounts, balance of
payments, and flow-of-funds databases, often supplemented with household
survey data, to the basic input-output table. A SAM therefore provides a comprehensive
and detailed quantitative description of the interrelationships in
an economy as they exist at a point in time, making it well suited as a tool for
evaluating the impact of alternative development policies. SAMs for many
countries can be found online. SAMs are often further elaborated with computable
general equilibrium (CGE) models, which assume that households
maximize utility and firms maximize profits. Utility (or demand) and production
functions are assumed or estimated from national data. The resulting impact