Spillover and Feedback Effects in General Equilibrium Interregional Models of the National Economy: A Requiem for Interregional Input-Output?

Abstract

Input-output is the most widely employed general equilibrium model for the analysis of demand disturbances to the regional economy. However, whilst input-output systems are relatively easy to implement, they have severe limitations. These include fixed production and consumption coefficients and a neglect of supply-side constraints. Therefore, although input-output is a convenient technique to use, the key question is whether it is appropriate for modeling a regional market economy. McGregor et al (1996a) argue that the outcomes predicted in a large range of conventional economic models for “small” regions converge on input-output results in the long run. Essentially, where a small region’s factor markets are ultimately fully integrated into their national counterparts, there is no regional scarcity of resources at the existing ruling prices. The addition of cost functions which are linear and homogeneous in input prices and output, together with cost minimization and any form of mark-up pricing, generates the demand-invariant prices which motivate fixed production and consumption coefficients.