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(Lecture Notes in Economics and Mathematical Systems 116) Dr. Kenichi Miyazawa (Auth.)-Input-Output Analysis and the Structure of Income Distribution-Springer-Verlag Berlin Heidelberg (1976)

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101 Ansichten146 Seiten(Lecture Notes in Economics and Mathematical Systems 116) Dr. Kenichi Miyazawa (Auth.)-Input-Output Analysis and the Structure of Income Distribution-Springer-Verlag Berlin Heidelberg (1976)

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continuation on page 137

Lecture Notes

in Economics and

Mathematical Systems

Managing Editors: M. Beckmann and H. P. Kunzi

Mathematical Economics

116

K. Miyazawa

Structure of Income Distribution

Springer-Verlag

Berlin Heidelberg New York 1976

Editorial Board

H. Albach' A. V. Balakrishnan' M. Beckmann (Managing Editor)

P. Dhrymes . J. Green . W. Hildenbrand . W. Krelle

H. P. KUnzi (Managing Editor) . K. Ritter' R. Sato . H. Schelbert

P. Schonfeld

Managing Editors

Prof. Dr. M. Beckmann

Brown University

Providence, RI 02912/USA

Universitat ZUrich

8090 ZOrich/Schweiz

Author

Dr.. Kenichi Miyazawa

Hitotsubashi University

Kunitachi,

Tokyo, 1861Japan

Library

or Congress Cataloging

in Publication Data

distribution.

(Mathematical economics) (Lecture notes in economics

and mathematical systems ; 116)

Bibliography: p.

Includes index.

1. Interindustry economics. 2. Income distribution-

Mathematical models. 3. Japan--Economic condi tions-Mathematical models. I. Title. II. Series. III. Series: Lecture notes in economics and mathematical

systems ; 116.

HB142.M59

339.2

76-000006

ISBN 978-3-540-07613-1

001 10.1007/978-3-642-48146-8

This w.ork is subject to copyright. All rights are reserved, whether the whole

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5.

Under

of the German Copyright Law where copies are made for other

than private use, a fee is payable to the publisher, the amount of the fee to

be determined by agreement with the publisher.

by Springer-Verlag Berlin' Heidelberg 1976

FOREWORD

The purpose of this study is in keeping with the shift in concern over the economic problems of growth to those of income distribution in recent years.

Income

distribution problems may be analyzed by not only the traditional procedures, but

also by some extensions of the input-output technique as I shall demonstrate in this

volume of the Lecture Notes.

This volume consists of three parts.

with some overlapping unavoidable:

input-output analysis and (2) Parts One and Three contain studies of the effects of

the structure of income distribution on some other economic relationships.

First, as an extension of the input-output analysis, we present a synthesis of

the Leontief interindustry matrix multiplier and the Keynesian income multiplier in

disaggregated form, and introduce a new concept which may be called the "Interrelational Income Multiplier" as a matrix.

ships among various income-groups in the process of income formation through the

medium of industrial production activity.

inclusion of the income generation process, which is omitted in the usual inputoutput open model, and by projecting the multiplier process into not only the outputdetermination side, but also into the income-determination side.

Secondly, we shall proceed to formulate a method of partitioning off the original Leontief inverse in terms of the combined effects of "Internal" and "External"

matrix multipliers and their induced sub-multipliers.

inverse provides us with knowledge of only the ultimate total effects of interindustry propagation and not the disjoined effects separable into the partial multipliers,

as such, our method may well be applied to the various kinds of problems that require us to trace back to the interactions among two or more strategic industry

groups.

Finally, some empirical applications of these two models are introduced, deal-

IV

ing with several cases from the Japanese economy and with an international comparison

of the interdependence between service and goods-producing sectors.

The empirical

illustrations also include the applications of an interregional version of the inputoutput model in the extended forms.

The other theme of this volume deals with the structure of income distribution.

In this context, we employ two methods of entirely different nature.

The first is an application of the above mentioned interrelational income multiplier model, by which we clarify the effects of income-distribution-factors on the

income determination process.

input-output open model, the same amount of autonomous expenditures cannot have varying effects on the level of national income even if the expenditures consist of different commodity proportions.

the relative income shares.

It will

be shown that in order to have the value of income vary in conjunction with the commodity proportions of demand, it is not sufficient to introduce the structure of

income distribution by types of income-group alone, but we must introduce at the

same time the distribution-factors by the types of industrial value-added for the

production structure also.

The second study is a differentials-analysis especially of wages and interests

as rewards to the factors of production.

concentrate our attention directly on income distribution among the primary inputs

by the size of firms.

considered in relation to distribution and to economic growth.

While numerous individuals have made important suggestions and criticisms, I am

especially in debt to K. Ara, A. S. Bhalla. W. H. Branson, S. Masegi, K. Ohkawa.

M. Shinohara. Y. Shionoya, and T. Watanabe.

Sato who read through the original manuscript with constructive criticisms and who

v

recommended this volume for publication in this Series.

acknowledges Gilbert Suzawa for correcting and improving the English content of the

original manuscript.

noted in the footnotes to each chapter, for permission to reproduce the original

articles in various revised form.

Tokyo,

August 1975

Kenichi Miyazawa

BY KENICHI MIYAZAWA

CONTENTS

FOREWORD

PART ONE:

I.

Introduction ........................................................ .

II.

of National Income...................................................

III.

2)

3)

Multipl ier ...........................................................

2) Accepted Multipliers as Special Cases

3)

IV.

1) The Properties of Leontief-type Matrices

2)

AS A MATRIX ........................................................... 22

I.

Introduction ......................................................... 22

II.

III.

IV.

V.

VIII

FUNCTION .............................................................. 43

I.

II.

Introduction ......................................................... 43

The Foreign Trade Multiplier and the Circular Flow of Intermediate

Products ............................................................. 44

III.

Economy .............................................................. 46

IV.

V.

VI.

Formula for the Computation of the Subjoined Inverse showing the Effect

of Endogenous Changes in Consumption ................................. 55

1)

2)

Propagation

PI~cess

Keynesian Multiplier

PART TWO:

CHAPTER 4 INTERNAL AND EXTERNAL MATRIX MULTIPLIERS IN THE INPUT-OUTPUT MODEL .... 59

I.

Introduction ......................................................... 59

II.

III.

IV.

1)

2)

SECTORS ............................................................... 76

I.

Introduction ......................................................... 76

II.

III.

1)

IX

2)

IV.

PART THREE:

CHAPTER 6 THE DUAL STRUCTURE OF THE JAPANESE ECONOMY AND ITS GROWTH PATTERN

I.

II.

Economic Growth and Differentials in Capital Intensity by Size of

Firm ................................................................. 101

III.

1)

2)

3)

1)

2)

Funds

3)

Loans

IV.

V.

1)

2)

INDEX ............................................................................ 133

PART ONE

INPUT-OUTPUT AND INCOME FORMATION

CHAPTER 1

INTERINDUSTRY ANALYSIS AND THE STRUCTURE OF INCOME DISTRIBUTION*

I.

rntnoductio~

exogenous variable, so that the usual Leontief matrix multiplier analysis lacks the

multiplier process via the consumption function that one customarily finds in a

Keynesian Model.

e~0genouo

variable in

the Leontief system, the household sector is routinely transferred to the processing

sectors, and is regarded as an industry whose output is labor and whose inputs are

consumption goods.

consumptiqn_function on a disaggregated level.

matrix multiplier which combines Leontief's propagation process with the Keynesian

propagation process in the form of the Leontief inverse multiplied by a

~nv~e

matnix.

~ubjo~~ed

consumption demand. l )

Nevertheless, this extension of the standard Leontief model may not adequately

deal with the interrelation between the interindustry and consumption structures.

The reason for this is' that the consumption structure generally depends on the

structure of income-distribution. The income-distribution structure regulates the

consumption pattern in that the consumption pattern consists of the expenditure behavior of various income-groups.

* This is a revised and integrated version of two articles which are originally

published, under the same title, in M~oeco~o~ca, Vol.15 Fas. 2-3, AgostoDicembre 1963 (with collaboration of Shingo Masegi), and in the theoretical part

of "Input-Output Analysis and Interrelational Income Multiplier as a Matrix,"

H~othub~hi JOUA~at 06 Econo~~, Vol.8, No.2, Feb. 1968.

1) K. Miyazawa [32J, especially Section IV and VI. See Chapter 3 in this volume.

and expenditure into the input-output system.

task is one of combining the Leontief output multiplier and the Kalecki multiplier

into its disaggregated and generalized form.

II.

Expe~e

06 National. Inc.ome

At the outset, in order to delineate the salient aspects our problem, we will

give a brief macro-numerical example of the model to be developed later.

In the

determines the level of output X via the input coefficient a = R/X = 3/4 (where R =

total

I

I

I

30

W 6

---------p 4

total X

40

I

I

I

I

I

I

I

2 40

1

=~

f- = 1 _1 3/4 . 10 = 40. This is a macrocosmic

But consumption C is originally induced by the income Y

( =

wage W + profit

p =

multiplier equation is Y = 1 ~ e

= 1 _ 18/10 . 2 = 10.

Thus by combining the simple Keynesian income multiplier with the simple Leontief

output multiplier, we obtain the following output solution for an input-output model

with endogenous consumption demand: 3)

1

1

1 fX=r:a

=r:-a'~'

I.

(i)

3) This macro-multiplier (or its disaggregated form) is derived more convincingly by

tracing the propagation process from the initial injections. This method of

derivation is utilized in Chapter 3.

tribution pattern.

= w/y and

Let d l

d2

= Gw/W and

a2

laborers and capitalists, respectively, then we have the generalized Kalecki income

multiplier

~ =1

(ald~

(i i)

= y/x = 1

If we let v

= w/X,

v2

= p/x

solution takes the following form:

(i i i)

This equation (iii) is the macro-counterpart of the matrix multiplier which we will

develop next.

2)

GenVta..Uza;tion 06

the

Inpu.t-Ou.tpu.t Model

The value-added sector in the interindustry model is not only divided into n

industry-groups along the column, but is also divided into r income-groups along the

row, as our simple macro-numerical example illustrates.

of the kth group earned from the jth industry as Ykj (j

4) If we let al

1,0

<

a2

<

= 1,

... , n ; k

1

(1 _ dl)(l _ ( ) as a special case of this expression.

2

_-,--'-1-.----,------;-,

1/2, then we have Y = T

- (ald l + a 2d 2 )

-- 1

- 1/2

= 1,

(6/10 + 1/2.4/10) 2

2 = 10.

... , r);

If we let a l

1

= 1,

a2

10 or

is also defined as consumption for the ith commodity by the kth income-group (i = 1,

... , n ; k = 1, ... , r).

where:

Fi gure 1

A =

= x .. Ix.,

1.-J J

V =

the

= Yk

C =

the n x

1.-J

r

Ix.,

a ..

1.-J

J

Let

i ,j

k

1, 2, ... , n

=1,2, ... , r

(n > r)

x = AX + fa + f

(1 . 1 )

(1 .2)

gard the household sector as a distinct decision-making unit instead of as a fictitious production unit, the introduction of a disaggregated consumption function is

necessary.

The consumption function of our model can be written as follows:

~ vk .x .

k=l

k=l

1.-

J J

(1 .3)

where

(k) _ (

(k)

- 0lk' 02k' ... , nk) , is a column vector and v

= (v kl ' v k2 ' ... , v kn )

is a row vector.

sumption function, C becomes the matrix of marginal coefficients, and in this case we

can include the nonhomogenous terms in f. 5 ) Substituting the consumption function

(1.3) into (1.1), we get

(1 .4)

X=AX+CVX+f

X

= [I

- A - CV]-lf

= B[I

- CVBr If

=B[I

+ CKVB]f

(i)

(i i)

(1. 5)

(i ii)

The first expression (i) in (1.5) gives us the

pli~

~ged inv~e

matnix multi-

showing the total effects of exogenous final demand on outputs via interindus-

try and induced consumption activities. The existence of the inverse [I - A - cv]-l

is generally verified.

[I

- A - cv] -1

(I - A)-l[I _ CVB]-l

= B[I

We can refer to the inverse

(1 .6)

- CVBr l

[I - CVB]-l

This in-

expenditure.

5) If we define some o(k), which is the capitalist group's coefficient, as <propensity to consume ptu6 propensity to invest>, our model formally contains the problem of induced investment.

The advantage of matrix multiplier formula (ii) in (1.5) is that it distinguishes the inverse reflecting endogenous consumption activity from the inverse reflecting production activity, in contrast to formula (i) which does not make such a

distinction.

expressed in a form which can be easily computed and revised.

The development of

such a practical computation formula is also useful from the standpoint of understanding the theoretical aspects of inter-income group activity.

a task.

Let us write

k=l, ... , r

v=l, ... ,r.

Then, as we shall show, we can prove that:

B[I -

CVBr 1

= B[I

(1.7)

+ CXVB].

The third expression (iii) in (1.5) means that the n x n subjoined inverse

[I - cv.s]-l can be obtained, without inversing the matrix, by the means of using the

~~etational

income

muttipli~

X whose order is r x r.

=I

X[I - VBC]

then

CX[I - VBC]VB

'"

= CVB

I - CKVB[I - CVB]

I

= [I

=I

- CVB

CXVB][I - CVB]

:. [I - CVBr l

=I

+ CKVB,

where identity matrices I's in the first and second equations have the order of

6) If we set r = 1 in (1.6), i.e., if we do not make a distinction among the incomegroups, the equation (1.6) coincides with the formula which we have derived elsewhere (see [32] p. 63 or (3.20) in Chap. 3), and it corresponds perfectly to the

macro-multiplier (i) in Section 1).

7

l' X 1',

and those in the third and subsequent equations have the order of n x n

respectively.

the

l'

l'

l'

the numerical table for B, we can renew the subjoined inverse whenever it is necessary to do so.7)

3)

We may also work out the proof of formula (iii) in (1.5) by the method which

traces the propagation process initiated by the original injections.

This method

may, at the same time, reveal the economic meaning of matrices Land K.

Denoting by m the numerical stage of the propagation process, we get

(m 1; 2)

(1.8)

Hence,

(1. 9)

Thus,

x=

m=l m

X

= B[I

= Bf

+ BC(

Lm- 2 )VBf.

m=2

(1.10)

m=2

+ C(I - L)-lVB]f

= B[I + CKVB]f.

(loll)

The matrix L

= VBC

from each income-group's consumption expenditure pattern.

7) Our model can be easily extended to accomodate an open economy with foreign trade.

8) The convergence conditions of our model will be examined in Section IV.

point, we take the vth income group as representative and trace its consumption expenditure effect on another kth income group's income.

increase in output

of each industry

->

increase in income

->

->

increase in consumption

->

(1.12)

That is, the coefficient Zkv shows how much income of the kth'income-group is generated by the expenditure from 1 unit of additional income of the vth income-group.

Thus we can term L the "matrix of inter-income-group coefficients", and K "the

interrelational multiplier of income groups".

A proposition arises in connection with the matrix of inter-income-group coefficients:

i'I' L

where

i~

= i'VBC

= i'[I

- A]BC = i'C

I'

n

n'

III.

The. Re1.a.UonolUp

(1.13)

I'

respectively.

06 In.:teJt-Income.-GJtouP.6 and

1)

a6

a. Ma.tJvi.x

As before,

denoting by Y the column vector of r order whose elements are household incomes by

income-groups, we get

(1.14)

Y = VX.

substituting formula (iii) of (1.5) into this expression (1.14), the income equation

becomes

Y = VB[I + CXVB]f

[I + VECX]VEf

(1.15)

[I + LX]VBf,

in which r + LX

= X because [r -

L]K

= I, so we obtain

(1.16)

Y = KVBf.

the propagation process caused by the initial autonomous injection of f, or final

demand excluding endogenous consumption expenditure.

VX{l)

= VBf

(1.17)

= LY{m-1)

m-1

=L

Y{l)'

for m

00

Y =

=

m~,r (m)

= Y (1)

[r + L + L

3

+ L + ... ]Y (1 ) .

(1.18)

income formation:

Y

= [I

- L]-l VEf

(1.19)

= KVBf

matrix form or simply ma.tJvi.x muLUp..{eJt

on

muLU-~ec.:toJt

..[nc.ome muLUpUeJl. in

..[nc.ome noJtma.t..[on.

10

following composition:

VB. 9 )

post-multiplied by

the direct and indirect induced incomes of each income-group attributable to the

initial autonomous demand. 10 )

This multi-sector income multiplier is a distinguishing feature of our model.

In the conventional input-output analysis, where consumption demand is entirely

exogenous, the outputs of various industries have different values depending on the

proportions of final demand;

come has the same value as final demand and does not depend on the proportions of

final demand.

income and group incomes) have different values depending on the proportions of final

demand, and this is due to the fact that our model takes explicitly into account the

structure of income distribution.

2)

eMU

This conclusion cannot be obtained by the introduction of an endogenous consumption structure without some explicit consideration of the distribution-pattern.

The

(a)

the matrix

V

be-

respectively, and assume that all value-added in the national economy consists of

the income accruing to the household sector,ll) then

9) An alternative justification for formula (1.19) was suggested by W. H. Branson

[4] at the Econometric Society Meetings, Washington D.C., 1967. Income generated by exogenous expenditure is equal to VBf, and income generated through

endogenous demand as a function of income is equal to VBCY, thus income Y is

given by Y = VBCY + VBf = [I - VBCr 1VBf.

10) To combine the income-effect in our model with the relative price-effect, we may

be utilized R. Stone's "linear expenditure system". See [50], [52].

11) With this assumption, v' becomes the vector of value-added ratios for the whole

economy, and in an economy with no foreign trade and government activities, the

conversion v' = i'[I - A] becomes possible. Then we get

v'B = i'[I - A][I - A]-l = i'I = i'.

Of course, if the household sector accounts for only one part of the value-added

sectors in the national economy, this conclusion must be modified.

11

-1 = 1K = [ I - L]

(1. 20)

1 - 0

comes

Y = KVBf

1-0

1-0

1-0 a

(1.21 )

scalar, too.

Thus our conclusion that income has different values depending on the proportions of

exogenous demand is not substantiated in the special Keynesian case. 12 )

(b)

economic form as in the Kalecki or Kaldor models, the above Keynesian result is not

improved.

Denoting by

L

where e' = i'C is the row vector of k order whose elements are the total propensities

to consume of each income-group. Then, we get Lm = (de,)m = d(e'd)m-l e , = dim-le',

where i is a scalar showing the weighted average of propensities to consume of each

income-group. Thus, the interrelational income multiplier in this case is

K

= [I =I

L]-l

=I

I i m- 1de' =

m=l

I Lm

m=l

I + _1_ de' ,

1- i

X = B[I + _1_ ai']f

1 -

13) Where, of course, the sum of all elements of d is equal to 1, i.e.,

12k _

d+d+ ... +d-1.

(1 .22)

12

and the fundamental equation takes the form:

Y

= KVBf

+ _1__ de'] dv'Bf = [I + _1__ de'] di'f = [d +

= [I

1-1.

1-1.

1-1.

(1. 23)

= _l-df.

1 -

~d]fO

In which case, the autonomous demand vector f becomes a scalar fO' and the equation

(1.23) coincides with the Kalecki multiplier, except when it is expressed in some

generalized form.

all that is required is to multiply both sides of the equation by summation vector

i', i.e.,

i'Y

= i,_l_ df = i'd-ll-i

l-i

= _1_ f

l_i

(1. 24)

If we assume the constancy of relative shares, the scalar 'i always takes a constant

value, and, after all, equation (1.24) ends up being formally equivalent to the

Keynesian multiplier (1.21).

(c)

customary

(f

Y

()

(1. 25)

and income equals final demand irrespective of the proportions of final demand.

Thus, in order to conclude that the values of income differ depending on the

proportions of autonomous final demand, it is necessary to introduce not only the

structure of consumption demand, but also the structure of income distribution.

3)

Sbw.c.twr.e 06

If we lump together the above two mechanisms of output and income determination,

we have the following system:

~]

[*J [~]

~].

(1. 26)

13

and it is expected that this solution can be converted to the form:

(1.27)

where g is a column vector of exogenous income. 14 ) The preceding separate solutions

(1.5) and (1.16) are equivalent to (1.27) where g is disregarded.

Now, let us return to the output propagation equation (1.10).

Equation (1.10)

can be interpreted as the propagation process viewed from the income-formation side.

But the same propagation process can also be observed from the consumption side or

the production side as well.

(a)

x

= Bf

=

(b)

= L)

Bf + BC[I - L]-lVBf

(1 .28)

x

= B[I

(c)

(1. 29)

X = [I + BCV + (BCv)2 + .. ]Bf

(1. 30)

[I + BC(I - L)-lV]Bf.

It is interesting to note that in all cases, we can obtain the computation formula (1.7) by projecting the propagation process into the income-formation side

VBC.

On the other hand, if we derive the sum of the geometrical progression from the

consumption side (CVB) or the production side (BCV), we do not obtain the computation

formula (1.7) directly, but instead obtain the equation (1.6) which is the product of

two inverse matrices.

14) The proof of (1.27) is easily demonstrable by use of the following identity:

L KVB

IK L-V 0

WQ]

iPrI '

[33], or (4.7) in Chap. 4, in which, if we let Bl = VB, B2 = BC and M = K, we get

(1. 27) .

14

character which contrasts strikingly with the nonhomogeneous character of both production and consumption activities.

One other point regarding the propagation process should be explained.

tions (1.28)

Equa-

production side is represented entirely by the effect of matrix B, and in the next

step, the propagation occurs on the income-formation and consumption expenditure

sides.

But instead of this assumption, we may assume that propagation occurs simul-

latter case, instead of equation (1.28)

In the

rewritten as follows:

x =f

We write

A +

(A

CV)f

(A

Cv)2f +

(1.31 )

00

L~

m=O

to be convergent, we have

(l .32)

X

= B[I

- CVB]-lf

= B[I

+

CKVBJf.

(1.31), have the same sum, but obviously the

(1.28)

~ncated

(1.30) has generally a larger value than the truncated multiplier in the

case of (1.31).

two cases.

IV.

fundamental equation, X

(I - A - CV) -1

= AX

(I - Q) -1

+ CVX +

~

f, (f

0, for our

1.

0 and of K = (

I - L)

lems and their relationships, we will first review the properties of the Leontieftype matrices as preparation for developing the convergence conditions of our model.

15

1)

For non-negative square matrices in general, the following properties are well

known:

[I] Let a be a n x n non-negative matrix.

00

(1 0)

L am

m=O

converges

(2)

(3)

(4)

= f has a

For Leontief-type matrices,. i.e. non-negative matrices with no column-sums

greater than 1, Woodbury gives the following lemma: 15 )

[II]

(I -

a)x

nonsingular.

00

Lemma 1.

Let a be Leontief-type.

L am

m=O

nonsingular.

Now, we may transform a into the form (1.33) below by some permutation matrix

(1 .33)

A2 . A2k

o

where Al , A2 , ... , Ak are indecomposable square submatrices, and k

>

2 or k

=1

Then we may improve upon another proposition of Woodbury's.16)

16) M. A. Woodbury [54], p. 357, ConoLt~y 3.6, where the condition is stated as

follows: "at least one of the column sums be less than 1 for some column in

each block. 06 columlU> of the matri x" .

16

[III] Let a be Leontief-type.

any non-negative

vecto~

t,

=t

ha6 a non-negative

6o~

~o~on

is that at least one of the column sums be less than 1 for some column in each

submatrices Al , A2 , ... , Ak in (1.33).

Based on [I], another form of [III] is obtained by replacing the paragraph

italicized in [III] with "all characteristic roots of a be less than 1" in absolute

value, which we call [III'].

Solow's Theorem asserts that condition [III'] is a sufficient one. 17 )

We can also show that it is necessary too. 18 )

A different form of [III] or [III'], more convenient for our purpose, is

Lemma 2. 19)

Let a be Leontief-type.

00

(1)

(2)

L am

m=Q

converges.

00

L am

m=Q

diverges.

18) Proof of the necessity of condition [III'].

We show that (i) implies (ii) below.

(i) All characteristic roots of a are less than 1 in absolute value.

(ii) Each Al , A2 , ... , Ak has at least one column-sum less than 1.

Suppose that the condition (ii) does not hold. Then all column-sums of some

A. are equal to 1. For m-dimensional vector j = (1, 1, ... ,1), m being the

d~gree of A., jA. = l.j, i. e. 1 is a characteri stic root of A.. As the

'I.

'I.

'!.

characteristic roots of Al , A2 , ... , Ak are also that of a, 1 is a characteristic root of a, unlike (i).

19) Proof of Lemma 2.

(1), (2) and the necessity of condition (3) are immediately evident from

[III'] and [I]. (As to (1) and (2), see also R. Solow [47], p. 32, p. 37).

00

m=Q

a must be decomposable and, for some A. in (1.33), all column-sums are equal to

1. If i = 1, let Al = A(l). If it- 1: Al ., ... , A. 1 . are all zeromatrices

'I.

'1.- ,'I.

(otherwise, at least one column-sum in the i-th block of columns of a must be

greater than 1). Hence we can remove A in (1.23) to the upper left corner by

some simultaneous permutation of rows and columns, without losing the character

of the form (1.33).

Then we let A.'I. = An (1).

In either case, a is decomposable into the form (1.34).

Sufficiency of condition (3):

Suppose that

17

(3)

00

L am

columns) :

~(l)

A(l2) ]

A(2)

are equal to 1.

(1. 34)

The assertions (1) and (2) in this proposition have nothing to do with the

And as for (3), it is the particular and not the general

decomposability of a.

To be precise, condition (3) includes two cases:

indecomposable and the case where a is decomposable, but not into the form (1.34).

Now, let us return to our model.

[pl]

[p2]

[p3]

l'

L a.. + Lvk

i=l

k=l

1.-J

l'

Lv

k=l kJ

>

0 or

>

LVkj

j=l

=1

n

La1.-J..

i=l

<

(j

1, 2, ... , n)

(j

1, 2, ... , n)

(k

1, 2, 00 ., 1')

[p4]

(A generaliza-

The existence of B = (I = A)-l is guaranteed by [p2J (See Lemma 2 (1)).

A, V and e are respectively non-negative, n x n,

=

l'

.. ) are also respectively non-negative,

l'

Lemma 3.

00)

l'

L Zkv =aV

k=l

As

(v

1,2,00',1')

l'

and n x n,

18

(2)

i=l

q .. = 1

1-J

Land Q are Leontief-type.

Co~o~y.

2)

Convengenee

Con~On6 ~n ~he

Model

We can now consider the convergence properties of the propagation process in our

model.

= jn. Thus,

+L

Ign

'"

I~.

m=O

is also Leontief-type.

Lemma 1,

'" m

I L coincides with that of

The convergency of

Theo~em 1.

m=O

Since I + R .. + ~ = I + C(I + L +

-m

IEm

and that

of I~

are equivalent.

I - R

f 0 and

Next, from

I - Q

f 0,

respectively.

And, since I where always

I - A

= I - A - CV = (I - CVB) (I - A),

f O.

Hence

I - Q

f 0 and

I - Q

I - R

I - R

I I

I - A

I,

f 0 are equivalent.

This means that I~ converges if and only if I~ converges, and therefore if and only

if

ILm converges.

A simultaneous permutation of rows and columns in A, reflecting a change in the

order of industry groups, induces a permutation of the columns in V and that of the

rows in C.

For brevity, we call the former I-permutation and the latter II-permutation.

Then, as a convergence condition of I~, we have:

Theo~em

2.

Let ak =

i=l

(k

a. k

1, ... , X')

1-

(1 0)

If all a l , ... ,

aX'

19

1,

LQF

(2)

If 01 = ...

(3)

converges if and only if A, V and C are not decomposable by any 11- and

c=

(1.35 )

V=

where 0

<

Proof.

<

n, 0

< 8 < P,

L q ..

i= 1 1.J

(k

(1)

ok

L q1.J.

i=l

= 1.

L q .

i=l

1.J

<

<

1 (k = 1, ... , p):

= 1,

= 1 if and only if

... , p)

(i )

J

PJ

LQF

Hence,

n

"

i=l 1.J

Thus,

LQF

n~

A, V and C only, and conversely.

Therefore

LQF

converges, from Lemma. 2. (3), if and only if Q is not decomposable by any I-permutation of A, V and C, into the following form:

20

equal to 1, 0

<

<

(i i)

n.

We shall prove that Q is decomposable into (ii) if and only if A, V and Care

decomposable into the respective forms represented in (1.35).

Let Q be decomposed into (ii).

Q, we may take

(i i i)

(O<t<1')

Vkj

(k = t + 1, ... , 1';

= 0

'l-J

(i = h + 1, ... , n;

l'

L c.kv k .

k=l

(i v)

j = 1, ... , h)

'I-

=0

1, ... , h).

=0

(i = h + 1 ,

... ,

n;

= 1,

. .. ,

cikvkj = 0

(i = h + 1 ,

... ,

n;

= 1,

... , h;

a .

'l-J

(v)

h)

k = 1,

... , 1')

(vi)

a rows of

Jk

>

0, for k

= 1,

obtai n

=0

V kj

Here 0

< B ~

<

(k = B + 1 ,

... ,

cik = 0

(i = h + 1 ,

t;

= 1,

... ,

h)

(vi) ,

... , n;

= 1,

... ,

B)

(vi i )

The last II-permutation changes the order of columns in c, but only among the

first

columns.

And, as

is unchanged, so is (v).

From (iv), (iv'), (v) and (vii), we conclude that A, V and C are decomposable into

the forms depicted in (1.35).

The converse is obvious, and the proof is completed.

21

The condition in (3) of this theorem contains the following two cases:

(a)

is indecomposable, (b)

and C simultaneously.

As a consequence we have

Corollary 1.

In the case where some c l ' ... , cr are equal to 1 and some less

than 1, L~ comverges if

is indecomposable.

ConoLt~y

1, where

n = 1, r = 2.

ConoLt~y 2.

of LLm.

Cono~y

3.

0, the

the convergence condition given in Theonem 2.

The zero parts of A, V and C in (1.35) may be as large, but no larger as V2

and Cl will vanish in view [p3] and [p4].

Moreover, we may adopt a more general assumption than [pl]:

[pl' ]

La .. + L V k

i=l 7-J

k=l

~ 1.

remains true, but (2) no longer holds.

(1) in Theonem 2

20) One case represented by assumption [pl '] is an open economy with foreign trade.

As shown in Section III, in the case of a cio~ed economy with no foreign trade,

the conclusion that income has different values depending on the proportion of

final demand can be derived only by introducing the structure of income distribution. But in the case of an open economy with foreign trade the same conclusion can be derived without introducing the distribution structure, because the

coefficients on the production side enter into the income-formation process

through imports. For the open economy model, refer to Chapter 3.

CHAPTER 2

INPUT-OUTPUT ANALYSIS AND INTERRELATIONAL INCOME MULTIPLIER AS A MATRIX*

I.

rntnoduction

chapter a new concept which might be called the "interrelational income multiplier"

in matrix form.

income-groups in the process of income formation, and in this respect it tells us how

much of one group's income is generated by another group's expenditure from one unit

of additional income via the medium of industrial production activity.

Although this

is formulated by the inclusion of the income generation process, which is omitted in

the standard input-output open model, and by projecting the multiplier process into

the income-determination side rather than the output-determination side.

Our extended model contains a theoretical implication not found in the Keynesian

model nor in the standard Leontief input-output model.

have different effects on the level of national income, even though the expenditures

have different commodity proportions.

as there are no changes in the relative shares of income and in the propensities to

consume of each income group.

expenditures, the total income is independent of the composition of autonomous expenditure. This result also holds in the case where household consumption expenditure is treated as an endogenous variable, in so far as we retain the assumption that

which was originally published, under the same title, in Hita~uba6hi ]o~nat 06

Eeanomic6, Vol. 8 No.2, Feb. 1968.

23

the level of income and its use do not depend on the composition of production. l ) In

the real world. however. autonomous expenditures of equal amount. but having different commodity compositions. appear to have different effects on income formation.

In

order to have an input-output model in which the value of income differs depending on

the proportions of autonomous demand. it is necessary to introduce not only endogenous consumption in disaggregated form. but also the structure of income distribution

by the type of income-group as well as by the tupe of industrial value-added.

This

In this chapter we shall see whether or not our extended model is consistent

with facts. We shall use the model to interpret input-output and related empirical

data.

II.

model is thus reformulated in a form suitable for this purpose.

Our

because the location of production depends on the location of consumption. and the

latter cannot be determined separately from the calculation of income generated in

each region.

Let us divide k regions into n industry sectors. and express the coefficients

of the model as follows:

A =

[{jJ ...

a~~

1.-J

unit of output of the jth industry in region s (i. j

.... n;

= 1. 2

1) This is true in the case of a closed economy with no foreign trade and government

activities. But in the case of an open economy with foreign trade and government

activities, the same conclusion does not hold, because the composition of production plays a part in the income formation process through imports, subsidies and

taxes.

.

24

[y~SJ

J

in each region.

the income of a household in region r earned from 1 unit of

v~S

J

(j

1,2, ... ,

n;

the nk x k matrix of coefficients of regional consumption

expenditure.

rs

ci

sector (i = 1,2, ... , n; r, s = 1,2, ... , k).2)

Using the nk x nk matrix of the usual Leontief interindustry inverse:

r1=

B = [I - A

[b~~J,

1.-J

(2.1)

the corresponding earnings by the household sectors in each region are easily determined as follows:

VB=

\' rs sr]

.. ,

~ lv.b

,s

(2.2)

J1.-

which forms the k x nk matrix of coefficients showing induced income earned from

production activities among industries and regions.

production due to endogenoU4 consumption per 1 unit of income in each region's household sector is given as the following nk x k matrix:

Be =

rLz:,rI b~~Cx:sJ.

(2.3)

J1.- 1.-

(2.4)

2) Instead of this definition, if we denote byeS the total propensity to consume in

region s, and by h~s the consumption-allocation coefficients for the ith commodi1.-

1.-

= cX:1.- s

25

since the multiplication of rectangular and square matrices V, Band C makes a new

k x k square matrix whose order is equal to the number of regions.

This square

matrix L may be interpreted as an array of coefficinets which shows the interrelationships among incomes of various regions through the process of propagation from

consumption expenditure in each region.

region s.

Of course, the income propagation process does not terminate after the one

round of inducement indicated by the coefficient matrix L, because the next round of

earnings will be generated as a result of the production activity induced by the expenditure from the preceding round of additional incomes.

as the "successive income generating process".

cussion process naturally leads to the intersectoral income multiplier among regions

of the following type:

K

The matrix

[I - L

r 1 = [krsJ.

(2. 5 )

This matrix shows the direct and indirect income-generaged per unit of income regionally originated, where, of course,

k x k.

Denote by X a column vector of nk order whose elements are output of n industries in each region, and by Y a column vector of k order whose elements are incomes

of the household sector in k regions.

order of final demand other than endogenous consumption expenditure, and g stands

for a column vector having k order of exogenous income. Then we have the following

system:

(2.6)

(2.7)

26

III.

The

Int~elational

Income

Muttipti~

among

Reg~on4

Japanese economy by utilizing the large 1960 interregional input-output table published in 1966 by MITI (the Ministry of International Trade and Industry). The table

required more than three years of preparation prior to its publication.

For analyti-

cal purposes, the original data tabulated in 9 blocks and 25 industrial sectors was

aggregated into three regions and 25 sectors.

other calculations for our model were done under the cooperation of the MITI-staff,

together with some other calculations for general or conventional studies. 3)

The logic of separating the Japanese economy into three regions, namely, the

Northeast, Middle and West, is based mainly on our desire to study the interrelationships between the advanced and backward areas in Japan. 4 ) Of these three regions,

the Northeast and West are relatively backward, and the Middle is the advanced area

in Japan.

The major industries are concentrated in the Middle, except for special-

ized regional sectors which exist because of resource endowments and other reasons.

Table 1 is the interrelational income multiplier for the three-region model.

The equations used here have been given in (2.4) and (2.5), i.e., K = [I - LJ- l =

[I - VBCJ- l , where the orders of matrices V, Band C in this case are 3 x 75,75 x 75

and 75 x 3 respectively.

endogenous.

Thus, the elements of V are not the value-added ratios for the economy

as a whole, but merely that of the household sector with the fraction corresponding

to the retained income of the business sector excluded.

3) See, Ministry of International Trade and Industry [24J. The details on dataarrangements for application of our model are shown in Chapter 2 of the Supplement Part of this report.

4) The Northeast is defined to include Hokkaido and Tohoku, the Middle includes

Kanto, Chubu and Kinki, and the West consists of Chugoku, Shikoku and Kyushu. The

manner in which Japan is divided into these blocks is based on the Regional Bureaus of MITI for the convenience of collecting regional data. Therefore, aggregation into three regions, consistent with economic areas, is somewhat restricted

by this base.

27

the coefficient matrices V and C are given in the Appendix tables in summary form. 5)

TABLE 1

INTERRELATIONAL INCOME MULTIPLIER FOR THE THREE-REGION MODEL

K = [I - VBCr 1

region

inco~e.

of income orlgln

receipt

Northeast

Middle

West

Total

Northeast

1.55

0.07

0.04

1.66

Middle

0.32

1.57

0.29

2.18

West

0.06

0.07

1.60

1.73

1.93

1.71

1.93

5.57

Total

presented in Table 1 follow from the nature of equation (2.5). The (p, s)th entry

represents the total household income of the pth region induced by expenditure from

1 unit of income earned in the sth region.

column of the Table tell us that:

rise directly and indirectly to 1.55 units of income in the Northeast itself, 0.32

units in the Miadle, 0.06 units in the West, and, in total, 1.93 units for the

national economy as a whole through the medium of expenditure and production

activities.

Let us now compare the column totals in the last line of the Table. These

5) We divide the consumption demand of the household sector into endogenous and

exogenous items, and only the former is included in the multiplier side. The ex~

ogenous household consumption included in the multiplicand side consists of the

expenditure from the transfer income from government, and its propensity to

consume is assumed equal to one.

With regards to thousehold income, we take the compensation of employees, wage

income of unincorporated enterprises and income from properties as endogenous

items,while the retirement allowance in the private sectors and transfer income

from government are treated as exogenous elements. The estimations of income and

its allocation among regions and sectors are mainly based on the income statistics

and input-output data.

28

values show the induced effects of each region's income on the household incomes of

the national economy as a whole.

Middle, 1.71, takes a slightly lower value than those for the Northeast and West

(both equal to 1.93).

relatively low in the Middle as compared with the Northeast and West, (2) as shown by

the coefficient values of matrix V presented in Table a of the Appendix, the weight

of manufacturing sectors which have low value-added ratios is relatively large in the

Middle area, and finally (3) the weight of the primary sectors which have high

value-added ratios is relatively large in the Northeast and West.

However,

significance.

Against these column sum values showing the induced effects

o~gin~ng

from

each region, the values of row totals on the right hand side of the Table show the

induced effects

~eceived

In contrast to the column sum values, there are large

amounting to 2.18, while the Northeast and West receive effects amounting to only

1.66 and 1.73 respectively.

of the Japanese interregional economy, namely, the concentration of income formation

in the advanced area.

To understand this point more clearly, let us look at each element in the matrix

K.

As shown in the column elements of the Middle area, the induced effects of the

Middle on each region appear intensively in the Middle itself, which takes a value

of 1.57, and appear only negligibly in the Northeast and West, where the values are

identically equal to 0.07.

the West on the Middle take the relatively high values of 0.32 and 0.29 respectively.

That is to say, there is a considerably tendency for induced income to flow from the

backward areas to the advanced area.

The main reasons for this tendency are that:

29

consumption coefficients of the Northeastern and Western regions for commodities

produced in the Middle are relatively higher than the Middle's consumption

coeffi~

cients for the Northeastern and Western commodities, and (3) as shown by the

coefficient values of matrix V presented in Table a of the Appendix, the ratios of

income-flow-out into the Middle from the Northeast and West are relatively higher

than those of the opposite directions.

the process of propagation account for the concentration of income in the advanced

area.

IV.

Campa~~on

Income-V~tkibutlon

The analyses in the preceding section have focused on the induced effects of a

unit of regional income, and have ignored the implications of the structure, or

commodity composition, of each region's autonomous demand.

In order to closely

examine this aspect, we have to shift our attention to the equation Y = KVBf.

We shall inquire into the problems of composition in two different ways.

In the

fundamental equation of income formation Y = KVBf, (i) let us replace the autonomous

demand vector f by the matrix Fl which shows autonomous expenditures separated into

three regional demands, and (ii) replace the vector f by the matrix F2 showing

autonomous expenditures separated into demand categories such as investment,

government expenditure and export, etc.

Yl = KVBFl

(2.8)

where, because the autonomous demand matrices Fl and F2 have the orders of nk x k

and nk x m respectively (m is the number of demand categories), the income Yl and Y2

become matrices having the orders of k x k and k x m respectively.

results are shown in the Table 2 and 3.

The estimated

30

The figures in Table 2-(a) are derived by dividing the column elements of Yl ,

which are shown in Column (c), by the corresponding regional total demands, and they

represent the coefficients of inducement to income per unit of autonomous demand by

each region.

The general features of Table 2-(a) are substantially the same as those

is a marked contrast between the induced effects by

~eg~on

in the last column of the Table).

As before, there

~eg~on 06 ~ec~pt

(averages

values of the Middle to those of the Northeast and the West, are magnified markedly

in this case (0.625 versus 0.117 and 0.190).

pattern of autonomous demand in each region, and reflects the fact that the location

of autonomous demand has a substantial effect in determining regional income generation, especially in the income-receiving base.

Table 2-(b) translates this result into the percentage dependency of income

formation by type of regional demand.

last line of the Table, 68.3 percent of all the income comes directly and indirectly

from the initial expenditure in the Middle, and the contribution of expenditures in

the Northeast and in the West are only 11.4 and 20.3 percent respectively.

Further,

as shown in each of the row elements, their regional pattern exhibits a striking

contrast between the advanced and backward areas.

itself (83.5%); the dependence on the Northeast and on the West are only 6.0 and

10.5 percent respectively.

in the

Northeast and in the West the self-dependent ratio of income formation is only

50

The dependency

ratios on the Middle are 40.3 percent in the case of the Northeast and 35.4 percent

in the case of the West.

Table 3 is concerned with the direct and indirect income generation by final

31

TABLE 2

DIRECT AND INDIRECT INCDME FORMATION BY REGIONAL DEMAND *

(a) The coefficients of income-inducement per 1 unit of each region's demand **

demand

origin

of lncome

receipt

Northeast

Middle

West

Average

Northeast

Middle

West

0.597

0.368

0.072

0.066

0.733

0.095

0.045

0.354

0.623

0.117

0.625

0.190

Total

1.037

0.894

1.022

0.932

reglo~

Junit: rJ

demand

origin

of lncome

receipt

Northeast

Northeast

Middle

West

Average

reglo~

Middle

West

Total

52.6

6.0

3.9

40.3

83.5

35.4

7.1

10.5

60.7

100.0

100.0

100.0

11.4

68.3

20.3

100.0

(unit: hundred millionyenj

demand

origin

of lncome

recei pt

reglo~

Northeast

Middle

West

Total

Northeast

Middle

West

6,457

3,976

775

4,942

54,942

7,099

870

6,897

12,157

12,270

65,815

20,031

Total

11 ,208

66,983

19,924

98,116

* Here, the regional demands are the tatals of final demands other than

endogenous consumption expenditure.

** Figures in (a) are derived by dividing the column elements of (c) by the

corresponding regional demands, and figures in (b) are calculated by dividing the

row elements of (c) by the corresponding tatals shown in the fourth column.

32

demand category.

the multiplier side, while on the multiplicand side we include business consumption,

exogenous household consumption and government consumption as exogenous items.

Other exogenous elements are investment expenditure, i.e. gross domestic fixed

capital formation and net inventory change, and export demand.

total is the same as that of Table 2.

coefficients for the Middle area have excessively high values for all final demand

categories.

Looking at the last line of the Table 3-(a) and comparing Columns (1), (2) and

(3) with Columns (4), (5) and (6), the multiplier effects on the household incomes

for the national economy are somewhat higher in the case of exogenous consumption

items than in the case of investment items.

characteristic not verifiable under the Keynesian type of macro-multiplier model. 6 )

However, as shown in Table 3-(b), among the figures of percentage dependency by

demand category, the weight of investment demand is excessively high, reflecting its

relative importance in the composition of exogenous final demand expenditures.

In order to determine the degree of leakage from the backward areas to the

advance area by the type of demand category, we must have a breakdown of the induced

pattern in terms of the three regions.

Looking at

the columns for the Northeast and the West and comparing the relative ratios of

leakage to the Middle by each demand item, one finds that investment expenditure

(especially the fixed capital formation) has extremely higher leakage ratios

compared to those of the other autonomous demand items.

percent in the cases of the Northeast and the West.

This result

each autonomous demand on incomes have values of less than one which may seem

strange. But this is solely because the income formation treated in our empirical

model is concerned with the household sector only and not with all value-added

sectors in the economy.

33

TABLE 3

DIRECT AND INDIRECT INCOME-FORMATION BY AUTONOMOUS DEMAND CATEGORY *

5

Bus i ness

Exogenous **

Gross

Net

Export Final

consumption household government domestic

inventory

demand

expenditure consumption consumption fixed capital change

total

ex enditure ex enditure formation

a The coefficients of income-inducement er 1 unit of demand

Northeast

0.135

0.152

0.178

0.100

0.120

0.080

Middle

0.633

0.586

0.691

0.609

2.555

0.651

West

0.191

0.254

0.272

0.169

0.173

0.153

Total

0.959

0.992

1.141

0.878

0.848

0.884

of income-formation b t

23.9

39.9

17.3

45.3

22.4

41 .2

19.2

43.6

(c) Di rect and i ndi rect income-formation by type of demand

unit: hundred million en

Northeast

1 ,071

2,931

4,889

1,372 12,270

814

Middle

4,108

11 ,388

29,765

3,760 11 ,191 65,815

West

1,783

4,488

8,259

1 174

2,635 20,031

Total

6,962

18,807

42,913

5,748 15,198 98,116

(unit: %

68.5

46.4

70.8

62.5

57.6

61.9

44.7

24.0

35.5

31.8

26.8

31.5

9.0

5.2

6.0

6.9

6.3

4.7

100.0

100.0 100.0 100.0

100.0

100.0

Northeast

Middle

West

Total

8.3

82.5

9.2

100.0

5.3

88.3

6.4

100.0

7.6

80.1

12.3

100.0

7.8

81.7

10.5

100.0

7.2

82.3

10.5

100.0

7.4

82.2

10.6

100.0

Northeast

Middle

West

Total

4.4

29.3

66.3

100.0

3.2

25.5

71.3

100.0

4.9

43.1

52.0

100.0

4.2

26.4

69.4

100.0

4.8

36.9

58.3

100.0

4.3

34.6

61.0

100.0

endogenous terms, and includes exogenous terms.

** The exogenous household consumption consists of the expenditure from the

transfer income from government, and its propensity to consume is assumed to be

equal to one.

34

TABLE 4

f1ATRIX MULTIPLIER OF INCOME-FORMATION (KVB)

1

Agriculture,

Forestry and

Fi sheri es

2

Coal and

Lignite

Mining

3

Mining

(except Coal

and Lignite

Mining)

4

Food and

Kindred

Products

5

Textile

Products

6

Lumber and

Wood

Products

I Northeast

Northeast

.906538

Middle

.243481

West

.053783

Tota

1.203802

1.009660

.280463

.054627

1.344749

.460262

.152632

.030566

.643460

.630688

.242529

.056604

.929821

.676045

.365511

.091897

1.133454

.843026

.268192

.054708

1.165926

Northeast

i~i ddl e

West

Total

Middle

.049332

.821486

.059352

.930169

.027020

.250411

.018038

.295469

.015286

.255333

.018153

.288772

.104287

.561904

.084368

.750559

.064992

.840818

.129003

1.034813

.081788

.821792

.111207

1.014786

III

Northeast

Middle

West

Total

West

.039351

.238634

1.004575

1.282560

.031125

.214965

.851031

1.097121

.008866

.061311

.236874

.307052

.041476

.228554

.689470

.959501

.048937

.445761

.652674

1.147373

.041067

.268799

.914037

1.223903

14

Metal

Products

15

Machinery

(n.e.c. )

16

Electric

Machinery

I Northeast

.532407

Northeast

Middle

.293503

West

".071810

Total

.897720

.415495

.274414

.056836

.746745

.358776

.402575

.061001

.822352

.478679

.380353

.079384

.938416

.386458

.313989

.048321

.748768

.665567

.344897

.083648

1.094

Northeast

Middle

West

Total

Middle

.057636

.691832

.089505

.838973

.052769

.584263

.075990

.713022

.057546

.630782

.076658

.764986

.054532

.683974

.089084

.827590

.054100

.700228

.068522

.822850

.087508

.736311

.102293

.926 12

III

Northeast

Middle

West

Total

West

.040977

.261317

.571499

.873393

.039003

.292234

.411371

.742608

.042746

.339861

.399158

.781866

.045068

.356402

.508611

.910081

.031320

.273683

.447222

.752226

.051917

.299476

.767488

1. 118881

II

II

18

19

17

Transporta- Precision Miscellaneous

tion

Machinery Manufacturing

Equipment

35

7

Pulp, Paper

and Paper

Products

8

Leather,

Leather Products and

Rubber

Products

9

Chemicals

10

Petroleum

and Coal

Products

11

Cerami c,

Clay and

Stone

Products

12

Primary

Iron and

Steel

Manufacturing

.710320

.267046

.057485

1.034851

.704887

.373968

.069501

1.148356

.542014

.236430

.057964

.836409

.488399

.166134

.043218

.697752

.655752

.254498

.056331

.966680

.440545

.191649

.037914

.670109

.427490

.181517

.036507

.645514

.112561

.718789

.136215

.967565

.062787

.783310

.088539

.934636

.060910

.551874

.096881

.709666

.032224

.228896

.047551

.308671

.062738

.688831

.089783

.841353

.059661

.432818

.078980

.571459

.059643

.361897

.063054

.484594

.050683

.266685

.678919

.996287

.041074

.334509

.718384

1.094566

.045674

.227787

.544705

.818166

.016850

.110659

.357799

.485308

.038872

.220726

.664984

.924582

.035173

.182297

.389012

.606481

.060441

.144228

.320252

.524921

20

Construction

23

21

22

Electricity, Wholesale Finance,

Gas, Water

and Retail Real Estate

and Sani tary Trade

and other

Services

Services

24

25

Transporta- Unallocated

tion

and Warehousing

.597559

.342581

.069564

1.009704

.577969

.175603

.034666

.788237

.957569

.250550

.047880

1.255999

.885472

.310845

.053373

1.249689

.813532

.260188

.066172

1.139892

.415535

.235111

.049605

.700251

.071192

.726509

.103628

.901329

.096956

.510829

.083456

.691241

.046641

.918089

.054238

1.018969

.055398

.978103

.065907

1.099407

.071111

.822386

.080381

.973878

.052801

.493789

.081708

.628298

.042013

.318394

.627697

.988104

.026387

.170733

.642278

.839398

.035126

.246350

1.005906

1.287382

.038302

.300031

.942282

1.280615

.069889

.254636

.735568

1.060093

.036963

.244505

.440008

.721476

13

Primary

Nonferrous

Metal

Manufacturi ng

36

suggests that a development program in the backward areas will have to contend with

many leakages in the propagation process and much of the benefits it generates in the

form of income will accrue to the advanced area.

It is instructive to examine how each sector's industrial activity plays a part

in the interregional income-formation process.

attention to the matrix multiplier KVB itself, which is shown in Table 4 having the

order of 3 rows and 75 (= 25 x 3) columns.

Inquiring into the first 3 x 25 part tabulated as the Northeast Column (I), we

can note which Northeastern industries have high leakage-ratios to the Middle area.

These are Electric machinery, Transportation equipment, Leather and rubber products,

and Textile products, all with values in excess of 0.35.

the order of absolute values, if we take the relative ratios of leakage to selfinduced effects, Electric machinery stands out clearly from the other sectors, with

Precision machinery and Transportation equipment next in rank.

In the case of the West, shown as part (III) of the Table, the ranking of

sectors shows a somewhat different pattern compared with that of the Northeast.

The

highest leakage-ratio to the Middle is found in the Textile industry, and next in

Transportation equipment.

self-induced effects are concentrated in some main manufacturing industries, and this

appears to be more a characteristic of the Northeast than that of the West.

v.

The analyses that have been made so far were limited to the income formation

process with the output determination side appearing only in an indirect manner

through the operation of the income multiplier as a matrix.

study the output determination side and compare briefly the analytical results based

on two different models:

These

37

analytical systems have already been given in equations (2.7).7)

Table 5 is a summary version of this comparison.

were computed by using the original Leontief inverse B, and "endo" were calculated by

using the enlarged inverse B[I - CVB]-l or B[I + CKVBJ.

it is f

vectors of the endogenous consumption demand and the final demand excluding

endogenous consumption respectively.

With regards to the effects of final demand by the demand category indicated in

Column I in the Table, the direct and indirect requirements of output in the

endogenous model have higher values (except the household consumption column (2))

than in the case of the exogenous model.

closely it is interesting to see what particular types of final demand have more

influence through endogenous changes in consumption demand.

exo-columns.

sectors, we may observe which sectors are relatively more affected by consumption

demand.

regions also.

Next, let us compare the effects of regional demands in the two models.

are indicated in Column II of the Table.

These

II-(a), it is noteworthy that the effects on direct and indirect output requirements

to the OWn

~egion

In other

account the endogenous income sector were given by H. B. Chenery's Italian

two-region model and L. N. Moses' American three-region model. See, H. B. Chenery

[5J, L. N. Moses [38J. However, in neither model, was the role of income

formation separated out from the output-determination mechanism in an explicit

formal framework.

38

TABLE 5

COMPARISON OF DIRECT AND INDIRECT REQUIREMENTS OF

OUTPUT BETWEEN THE TWO MODELS *

Final demand by demand category

1.

(1)

(2)

Household

consumption**

expenditure

total exogenous

only

Business

consumption

expenditure

exo

el1do

exo

evtdo

(3)

General

government

consumption

expenditure

exo

evtdo

(4)

Gross domestic

fixed capital

formation

exo

evtdo

Northeast

Middle

West

1 ,936

11,914

2,986

3,737 20,982

20,420 106,860

5,665 34,521

3,181

14,448

5,624

3,640

17,844

6,123

7,871

35,910

12,817

Total

16,836

29,822 162,363

23,252

27,607

10,456 18,487

91,527 135,559

23,427 36,699

Northeast

Middl e

West

4.7

4.4

3.9

9.1

7.5

7.3

51.1

39.5

44.7

7.8

5.3

7.3

8.9

6.6

7.4

19.2

13.3

16.6

25.5

33.8

30.3

45.1

50.1

47.5

Total

4.3

7.7

41. 7

6.0

7.1

14.5

32.2

49.0

Northeast

Middle

West

0.219

1.346

0.337

0.422

2.307

0.640

0.248

1.263

0.408

0.453

2.061

0.802

0.221

1.082

0.371

0.477

2.178

0.777

0.214

1.871

0.479

0.378

2.772

0.750

Total

1.902

3.369

1. 919

3.316

1.674

3.432

2.564

3.900

* The model exo regards the consumption demand as exogenous, and the model

el1do as endogenous; their solutions are given by X = [I - A]-l{fc + f} and

[I - A]-l[I - CVB]-l f

** The consumption in Column-"total" in (2) includes the term f c ' and that in

Column-"exogenous onl y" excludes f c .

39

II.

(5)

Net

inventory

change

exo

I ettdo

(6 )

Final

demand

total

Export

exo

I ettdo

exo

I ettdo

(i)

Northeast

exo

I ettdo

(i i i )

West

(i i )

Middle

exo

J ettdo

exo

J ettdo

1,577 2,900 2,434 4,950 41,026 41,026 26,403 20,759 12,741 17,229 1,881 3,038

10,921 16,655 31,741 47,815 270,807 270,807 14,847 16,987 232,375 224,823 23,585 28,997

2,856 4,699 7,319 11,728 77 ,232 77 ,232 2,509 3,328 23,379 30,722 51,34443,182

15,354 24,154 41,495 64,493 389,065 389,065 43,760 41,074 268,495 272,77576,81075,217

%)

19.3

3.8

4.0

3.7

6.8

6.2

6.1

5.9

11. 7

9.5

12.1

17.7

15.2

100.0

100.0

100.0

100.0

100.0

100.0

64.4

5.5

3.2

50.6

6.3

4.3

31.1

85.8

30.3

(unit:

4.6

42.0

83.0

8.7

39.8 66.5

3.9

6.2

10.7

16.6

100.0

100.0

11.2

10.6

69.0

70.1

1.612 2.458 1.847 2.782

0.421 0.694 0.426 0.683

0.224

1.481

0.422

2.571 0.691 1.574

0.734 0.117 0.308

0.102

1.863

0.187

2.999 0.644 1.486

0.410 1.404 2.214

2.128

3.696

2.152

2.038 3.798

19.7

7.4

10.7

55.9

40

drawn from this fact is as follows:

be liable to

ov~vaiue

A conclusion to be

With regards to the effects of regional demands on the national economy, the

results are shown in the last line of Column II-(a) or -(b).

model, in contrast to the exogenous model, the direct and indirect output requirements due to demand originating in a backward region (Northeast or West) is lower in

value, while the value due to the demand originating in the advanced region (Middle)

is higher.

things.

As shown in the last line of Column II-(c), in the case of the endogenous

model, the coefficient of output requirements of the Middle takes the lowest ranking

in order.

Just the opposite is true in the case of the exogenous model in which the

coefficient of the Middle is shown to have the highest value among the three regions.

In short, switching the model from exogenous to endogenous means that the output

requirements due to the autonomous final demand originating in the advanced area

increase in ah60lute value, but that the

deg~ee

process of output determination.

41

APPENDIX

TABLE a

COEFFICIENTS OF VALUE-ADDED OF THE HOUSEHOLD SECTOR IN EACH REGION

(unitl0- 4 )

Agricul Min- Light Heavy Con- Trade Finance Trans- Others Average

Serv- portai nstructure,Fol" ing i ndustry dustry tion

ices tion

estry

Northeast

Northeast

Middle

West

Total

(Output)

4,638 4,871

8 181

0

7

36

50

69

36

81

9

2

0

0

0

0

0

2,983

43

1

1,061

3,027

996

44

3

6,941

1,721

1,863 41 ,026

Middle

Northeast

Middle

West

12

5,386 4,470 1,342

1

1

2

3

0

0

1,377 1,854 4,555 4,652 3,415 8,388

3

2

2

0

2,412

Total

2,414

(Output)

14,503

West

Northeast

Middle

West

0

0

108

21

23

5,296 4,440 1,140

Total

(Output)

2

0

2

4

86

86

95

5,076 4,934 3,520 1,057

42

2,588

2,631

25

47

994 1 ,919

9,513 1,582 15,075 23,360 5,906 3,553 11,986 2,824 3,432 77 ,232

National average

Northeast

Middle

West

Total

(Output)

98

983

202

450 1,169

55

225

482

569

1,036 1,317 3,481 3,196 2,479 5,776

198

726

993

618 2,151

357

315

1,692

515

2,522

1,189 1,781

2,427 1,151

1,561 1,788

32,294 3,934 85,631 117,865 31,815 24,892 59,620 16,138 16,874 389,065

for convenience.

** Unit of output: one hundred million yen.

42

TABLE b

CONSUMPTION COEFFICIENTS OF EACH REGION

Northeast

I~ortheast

Mining

Light Industry

Heavy Industry

Constructi on

Trade

Finance &Services

Transportation

Others

Sub-total

Middle

Agriculture & Forestry

r,1ining

Light Industry

Heavy Industry

Construction

Trade

Finance & Services

Transportation

Others

Sub-total

West

Agriculture & Forestry

Mining

Light Industry

Heavy Industry

Construction

Trade

Finance ~ Services

Transportation

Others

Sub-total

Total

Agriculture & Forestry

Mining

Light Industry

Heavy I ndus try

Construction

Trade

Finance & Services

Transportation

Others

Total

Middle

(unit:10- 4 )

Nati onal

I average

West

764

76

2,830

74

0

1,255

2,151

409

140

7,699

87

1

156

5

0

5

8

1

5

268

42

0

43

2

0

2

1

0

0

90

170

11

497

13

0

175

300

57

22

1,245

113

0

1,305

499

0

157

46

11

2

2,133

429

3

3,789

542

0

1 ,321

2,496

600

259

9,439

47

0

961

423

0

165

55

4

0

1,655

302

2

2,828

510

0

907

1,623

389

168

6,729

24

0

133

6

0

4

1

0

0

168

95

2

170

12

0

4

8

2

0

293

612

5

3,388

108

0

1 ,103

2,398

503

137

8,255

199

3

873

32

0

245

533

111

30

2,026

901

76

4,268

579

0

1 ,416

2,198

420

142

10,000

(0.870)

611

6

4,115

559

0

1,330

2,512

603

264

10,000

(0.761)

702

5

4,392

533

0

11 ,270

2,454

507

137

10,000

(0.855)

671

16

4,198

555

0

1,328

2,455

557

220

10,000

(0.794)

* Figures in parentheses in the last line show the total propensity to consume

of each regi on.

** Sectors listed here are aggregated to 9 from the original 25 classifications

for convenience.

CHAPTER 3

FOREIGN TRADE MULTIPLIER, INPUT-OUTPUT ANALYSIS

AND CONSUMPTION FUNCTION*

I.

Inttoducton

There has long been certain defects in the treatment of imported intermediate

goods in the usual Keynesian foreign trade multiplier analysis.

In its fundamental

inconsistently with the domestic sector in the circular flow.

national product excluding intermediate goods, while M stands for imported goods.

including intermediate products.

On the other hand, Leontief's matrix multiplier model has been devoted exclusively to the analysis of intermediate products in the circular flow; but unlike the

Keynesian model, it lacks a mechanism for the multiplier process via the consumption

function.

Formally, the household sector can be dealt with in the Leontief system

as an industry whose output is labor and whose inputs are consumption goods.

However, a more appropriate procedure in dealing with consumption is not to regard it

as a fictional production activity but to introduce the Keynesian consumption

function in its disaggregated form.

In this chapter, we shall try to close these two gaps by revising the conventional foreign trade multiplier, on the one hand, and by developing an input-output

analysis dealing with the consumption function, on the other. Thus, without

considering the income-distribution structure, we extend our input-output model of

Chapter 1 to an open economy.

It was shown in Chapter 1 that in the case of a closed economy with no foreign

trade, the conclusion that total income varies in accordance with the proportions of

final demand can be obtained only by considering the structure of income distribution

together with the input-output structure.

06 Eeonomic6, Vol. 74, No.1, Feb. 1960, and is reproduced with minor revisions

and with some additions to the Tables. The author is indebted to Mr. Shingo

Masegi, professor of Yokohama City University, for the mathematical formulation in

Sectlon VI.

44

foreign trade, however, the same conclusion can be derived without explicitly

considering the distribution structure.

cients on the production side enter into the income formation process through

imports.

process is usually given as:

2

+ P + P + P + ..

1

=~

(3.1)

preceding each component of the series is a

tion.

~ub-muttlpteA ~oc~~

involving produc-

For example, the first item of the above series (the primary additional income

1), is the outcome of the production activity in the sectors favored with the primary

This primary subprocess due to one unit of autonomous injection can be expressed as

follows:

Increase in Y (= income)

2

(1 - a) + a(l - a) + a (1 - a) +

Increase in R

(=

a + a 2 + a3

1 - a

=.,.---:-a=

(a)

intermediate goods)

=_a_

(b)

1 - a

But

this procedure is appropriate only in the case where there is no leakage in the

submultiplier process, and in orthodox Keynesian reasoning this condition is satisfied by the assumption that the multiplicand is equal to the autonomous investment

(or export) minuh import of intermediate goods required for the production of

investment goods (or exported goods).

imported intermediate goods required for the production of investment goods (or

exported goods) are treated as an exogenous factor in the multiplier process.

Logically, however, we should treat the imported intermediate goods as an endogenous

factor induced by the initial injection. Thus we should rewrite the above

45

Increase in Y

2 2

(1 - a) + ay(l - a) + a y (1 - a) + ....

1 - a

= -1-- ay

(a)'

Increase in R

2

3 2

a+ay+ay +

= __a_

(b)'

1 - ay

where y is the self-sufficing ratio of materials (that is, y = B/R) , where B is the

demand for demestic intermediate products.

~l

- a

-ay

<

Obviously, since y

<

1, we have

-- ay

a = h, then we can call 1 - h

primary additional income, but less than 1. Let ~l

the leakage coefficient in the submultiplier process dealing with production

activities.

Since similar submultiplier processes precede all the other secondary increases

in income (due to additional consumption expenditures), the whole income-generating

process can also be given as:

(3.2)

This foreign trade multiplier takes into account the intermediate products in the

circular flow.

Of course, the usual Keynesian foreign trade multiplier generally does take

into account the import of intermediate goods required for the production of

consumption goods, but this is done inadequately.

expenditure side only, and no

~xplieit

Nevertheless,

the intermediate goods required for the production of consumption goods, as well as

those required for the production of investment (or export) goods, are not imported

at the income-expenditure level, but in the production-submultiplier process.

In

our multiplier, the import of intermediate goods is taken into account in its proper

context, namely, in the circular flow of intermediate products.

In order to express our multiplier in a form comparable with the orthodox

46

Keynesian multiplier, let X = Y + R denote the total output, (1 - a) = Y/X the value

added ratio, and A = R/Y the material coefficient, then A = ~

= R/X = ~-so that

Y Y/X

1 - a'

1 - a

- a

h=-l_ay=l - a + a -

+ All _

ay

__h_ =

1

or 1 - ph

1 - p + A( 1 - y)

- -:-1--~(a---m'"T")-+~A..-.(1---y-'-)

(3.3)

where a stands for the marginal propensity to consume and m the marginal propensity

to import finished goods (p = a - m).

III.

The Modi6ied

Multip!i~

and

~he

Fundamental Equation

6o~

an Open Economy

From this new foreign trade multiplier (3.3), we derive the following conclusions:

(i)

Depending on the industries that enter into the propagation process, our

multiplier has different values since the interindustry average values of A and y

differ with each pattern of propagation. This is a characteristic which is not

found in the orthodox Keynesian foreign trade multiplier.

(i i)

- p

1 _ (a1 _ m) , and coincides with the Keynesian foreign trade multiplier in the case

where induced imports are restricted to finished goods only.

coincides with our concept of p in series (3.2), since with no imported intermediate

goods, h becomes equal to 1 and series (3.2) is converted into series (3.1).

(iii)

goods required for the production of consumption goods, the Keynesian concept of p

will differ from our concept.

between income and that consumption imputable to domestic factors, in other words;

the value of imported intermediate goods is excluded from the value of consumption.

But this is clearly a nonoperational concept.

necessary in the Keynesian model because all propagation processes are projected into

the income-expenditure side only.

47

two distinct propagation processes, assuming essentially different characteristics.

Our multiplier also can be derived from a revised fundamental equation for an

open economy.

Y+M

=C+I+E

Y+tI+~

=C+I+E

r--"--\

Y + (R - H) + MC = C + I + E

where

R

tI = the

= total

(3.4)

Here we can incorporate the import function of intermediate goods by using two

parameters, the material-coefficient A. and the self-sufficing ratio of materials y,

that is

tI = (R - H) = (1

(3.5)

- y)AY

The economic meaning of this function is that the import of intermediate goods is

not directly a function of Y, but rather a function of AY, i.e., the total intermediate goods required for the production of yl).

goods and the consumption function may be written as ~ = ~(y) and C = c(y)

respectively.

we get

Y + A(l - y)Y + ~(y) - c(y) = I + E

(3.6)

6Y/6(I + E)

= 1 _ (0 - m) + A(l - y)

-p+A(l-y)

(3.7)

This result coincides with (3.3) derived by working out the geometrical progression which combines the income-circular flow with the circular flow of intermediate

1) The import function of intermediate goods may also be written as:

tI = (1 - y)AY + g

where g is constant. In this case, parameters y and A become "marginal"

coefficient.

48

products.

The parameters y, A, a, which are crucial in our foreign trade multiplier

formula, may have different values depending on the nature of the industries entering

into the propagation process. Therefore, for a more detailed analysis, we must

utilize Leontief's analysis of interindustry relations.

For a comparison with the Leontief system, let ~ = ~/X denote the import

coefficient, then A(l - y) in (3.7) may be converted into the following expression:

A(l - y)

= ~Y = ~/X

= --1:!....-..

Y/X

1 - a

Substituting this relation in (3.7), we obtain another variant for our foreign trade

multiplier:

tJ.Y/tJ.(I + E)

1 - a

(1 - p)(l - a) + ~

(3.8)

Now, if we take the total output multiplier instead of the income multiplier (3.8),

we get

1

AX/tJ.(I + E) = (1 _ p)(l - a) + ~

(3.9)

This total output multiplier (3.9) corresponds to a Leontief inverse matrix in which

the consumption function is integrated. 2) In order to prove this point, we must

turn to the input-output system in the next section.

IV.

A Ma.tJL.i.x MuU-tplieJt

[I - A + M]X = f a + f

(3.10)

X may then be redefined as equal to Y + domestic intermediate goods, with

corresponding modifications of coefficients a and ~. using the redefined X as

denominators. Similar procedures may be applied to the input-output system in

the next section.

49

where

I

..

n order

~i

f a = a column vector of consumption demand

f = a column vector of final demand other than consumption.

This model differs from that of Leontief only in the treatment of imports as an

autonomous element.

X = [I - A + M]-lf

where

f = fa

(3.11 )

multiplier [I - A + M]-l in (3.11), can be derived by adding the two subseries {al'

and (b)' in the submultiplier process on page 45, i.e.,

..l...:....sf +

1-

ay

_a_ = _ _

1_ =

1-

ay

1 - ay

-=----=-__3)

- a +

regard the household sector as autonomous and independent of the other n processing

sectors.

converted into a (n + 1) x (n + 1) matrix multiplier. The household sector is

accordingly regarded as an industry whose output is labor and whose inputs are

consumption goods, and is treated just as the others are, i.e., its input-output

ratios are assumed constant.

of choice-making, i.e., the consumption coefficients, are not as stable as the input

coefficients of the other processing sectors, so that (n + 1) x (n + 1) inverse

3) This is because

ay =

RH

H

R-P1

xIi

= X = -X-- = a

- ~

50

Therefore, instead of treating households as an industry, we should introduce

the Keynesian consumption function in its disaggregated form and retain the same

number of processing sectors as before.

written as follows:

= C(I

fa

(3.12)

- A)X

where C =

n .... an

It is easily verified that C(I - A) equals the product of the column vector of

consumption coefficients and the row vector of value-added ratios. 4 ) Instead of

(3.12), if we add the nonhomogeneous term to the consumption function, a. becomes a

~

marginal coefficient.

included in

f.

[(I - C)(I - A)

M]X = f

(3.13)

X = [(I - C)(I - A)

M]-lf

(3.14)

(3.9).

trix in (3.14) is converted into the form [I -

inverse [I - A + M]-l multiplied by the inverse [I - CH]-l which shows the effects

4) Denoting by a the column vector of consumption coefficients and by i' the row

vector = (1, 1, ... 1), we then have C(I - A) = ai' (I - A). Since i' (I - A) =

(1 - Ia'l'

1 - Ia.~ 2 , .... , 1 - Ia.w ), the term i'(I - A) equals the row vector of

~

value-added ratios.

51

of endogenous changes in the consumption demand of the household sector. 5 ) The

proof is as follows:

[(I - C)(I - A) +

Mr 1

[I - A

M - C(I - A)]

-1

= [{I - C(I - A)B}B]

(3.15)

We can refer to the inverse [I - CH]-l as the "subjoined inverse matrix showing the

effect of endogenous changes in consumption. ,,6)

Since the above procedure which distinguishes the inverse

(reflecting produc-

obviously satisfies theoretical requirements, we can now combine these two inverses

by the formula (3.15).

Numerical estimates for the above inverse matrices are presented in this

section.

60~

06

Int~ndUh~

RetatiOn6

1951 and 1954, published by the Japanese Ministry of International Trade and

consumption demand as exogenous, since i'H equals the product of the row vector

of value-added ratios and the Leontief matrix multiplier.

6) Precisely speaking, in the above model, C is the square matrix of consumption

coefficients of domC6t1c goodo, and M is the diagonal matrix of import coefficients of int~ediate goodo. But, if the distinction between imported

intermediate goods and imported finished goods is not made statistically, we must

then interpret C as the matrix of the consumption coefficient including imported

finished goods, and M as the matrix of the import coefficient of intermediate and

finished goods. Of course, this is not theoretical.

7) Ministry of International Trade and Industry (MITI)[23], which is fue first publication of input-output tables in Japan. In this volume, the concept of import

coefficient is defined to include imported finished goods as well as intermediate

goods. See preceding footnote 6).

52

TABLE 1

TOTAL DIRECT AND INDIRECT IMPORT REQUIREMENTS IN JAPAN

(1 )

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

Agriculture ( Food)

Agriculture (Textile Material)

Agri cul ture (Rubber t1ateri a1 )

Agriculture (Hide)

Forestry

Fi shery

Coal and Lignite

Crude Petroleum and Natural Gas

Iron Ores

Nonferrous Meta11 ic Ores

lionmeta 1i cOres

Food Processing

Textile and Apparel

Lumber and Timber Products

Pulp, Paper, Print and Publishing

Chemicals

Coal Products

Petroleum Products

Rubber Products

Leather and Leather Products

Stone, Clay, and Glass Products

Iron and Steel Products

Nonferrous Metals

t1achi nery

All Other Manufacturing

Manufactured Gas

Electric Power

Transportation and Communication

Construction

Trade

Business and Personal Service

Textile Rug and Waste

Scrap (Iron and Steel)

Scrap (Nonferrous Meta 1)

Scrap (Others)

Una 11 ocated

1951

Rate of

1954 Increase 1951

0.183

0.857

1.000

0.816

0.052

0.097

0.125

0.852

0.870

0.298

0.404

0.144

0.372

0.049

0.119

0.156

0.111

0.604

0.478

0.525

0.106

0.127

0.161

0.127

0.119

0.093

0.071

0.089

0.073

0.033

0.057

0.427

0.038

0.057

0.077

0.150

0.215

0.873

1.000

0.801

0.055

0.114

0.200

0.935

0.882

0.301

0.435

0,159

0.324

0.058

0.128

0.170

0.172

0.669

0.475

0.538

0.152

0.185

0.238

0.194

0.158

0.163

0.096

0.103

0.101

0.045

0.071

0.193

0.166

0.247

0.079

0.205

(%)

117.5

101.9

100.0

98.2

105.8

117.5

160.0

109.7

101. 4

101.0

107.7

110.4

87.1

118.4

107.6

109.0

155.0

110.8

99.4

102.5

143.4

145.7

147.8

152.8

132.8

175.3

135.2

115.7

138.4

136.4

124.6

45.2

436.8

433.3

102.6

136.7

0.336

0.883

1.000

0.850

0.229

0.266

0.288

0.879

0.894

0.429

0.515

0.304

0.486

0.227

0.279

0.314

0.278

0.678

0.575

0.614

0.273

0.290

0.317

0.290

0.283

0.264

0.246

0.260

0.244

0.214

0.231

0.532

0.215

0.231

0.247

0.307

(II)

Rate of

1954 Inc(~)se

0.405

0.904

1.000

0.849

0.285

0.329

0.394

0.951

0.911

0.471

0.572

0.364

0.489

0.287

0.238

0.372

0.373

0.750

0.603

0.651

0.358

0.382

0.423

0.390

0.362

0.369

0.316

0.321

0.320

0.277

0.297

0.393

0.369

0.431

0.303

0.428

120.7

102.4

100.0

99.9

124.6

124.0

136.7

108.2

101.8

109.8

111.0

119.7

100.6

126.6

85.2

118.4

134.5

110.6

104.9

106.0

131.2

131.9

133.3

134.5

127.8

139.8

128.2

123.7

131.1

129.9

128.9

73.8

171.8

186.6

122.9

139.7

53

TABLE 2

TOTAL DIRECT AND INDIRECT EMPLOYMENT (man)

REQUIREMENTS FOR THE OUTPUT OF ONE MILLION YEN

I!lbl

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

1954

23,468

16,925

111l7TIT

1.51

1.08

13,620

2,990

4,740

3,383

2,260

2,176

2,978

2,950

4,480

2,720

4,831

3,240

3,690

3,012

539

2,210

3,590

3,700

2,850

2,095

3,670

4,450

2,906

2,379

3,203

5,752

4,782

4,250

2,450

2,920

1,206

1,640

3,450

15,639

12,583

13,720

11 ,472

2,922

3,370

10,073

8,662

12,952

9,581

14,393

7,809

12,105

11,395

3,716

7 ,563

8,281

12,286

11,080

9,814

11 ,837

12,966

11 ,425

11 ,529

12,313

14,813

14,448

13,672

10,644

11 ,383

5,970

10,990

11,480

1.15

4.21

2.89

3.39

1.29

1.55

3.38

2.94

2.89

3.52

2.98

2.41

3.28

3.78

6.89

3.42

2.31

3.32

3.89

4.68

3.23

2.91

3.93

4.85

3.84

2.58

3.02

3.22

4.34

3.90

4.95

6.70

3.33

(II )

(II)/(I)

(I)

16,849

16,853

25,827

18,339

1.53

1.09

15,550

15,640

17 ,553

2,939

4,847

3,850

2,719

3,133

4,242

4,306

5,539

3,761

5,488

3,788

4,696

3,653

854

2,961

4,139

4,514

3,654

2,544

4,409

5,346

3,556

3,380

4,512

6,439

5,571

5,556

2,855

2,670

1,414

1,905

3,589

19,569

13,330

14,772

12,906

4,221

4,554

11 ,947

10,848

14,946

7,415

15,956

13,481

13,991

13,445

5,197

8,791

9,364

14,328

13,236

11,740

13,987

15,017

13,611

13,689

14,657

16,513

16,191

15,909

9,143

13,222

11 ,795

12,034

12,928

loll

4.54

3.05

3.35

1.55

1.45

2.82

2.52

2.70

1.97

2.91

3.56

2.98

3.68

6.09

2.97

2.26

3.17

3.62

4.61

3.17

2.81

3.83

4.05

3.23

2.56

2.91

2.86

3.20

4.95

8.34

6.32

3.60

(I)

(II)

54

TABLE 3

TOTAL DIRECT AND INDIRECT CAPITAL

REQUIREMENTS FOR THE OUTPUT OF ONE MILLION YEN

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

(I )

1.8892

.3287

.4241

.6466

.9525

1.0828

.1836

.1455

.7710

.7865

.9631

.9132

.9330

1.0942

1.3756

1.6443

.3845

.7087

.6450

1.2204

1.3554

.864?

1. 1799

1.1092

2.1209

4.9968

3.5677

1.1957

1.2205

4.1621

.3643

.5713

.2946

.3893

1.3050

1951

4.4275

.7602

PI J/lI )

2.34

2.31

1 .8163

.2919

1954

{II J

4.8461

.7824

.9939

3.5860

3.7574

3.7949

.5383

.5473

2.9486

2.6355

3.6216

2.7997

3.8916

3.8336

4.0026

4.4117

1.6128

2.3282

2.1853

3.9939

4.0634

3.4643

3.8868

3.8424

4.9626

7.9102

6.4066

4.0428

4.2218

7.0881

2.1414

3.5536

3.2286

3.2519

3.9445

2.34

5.55

3.94

3.50

2.93

3.76

3.82

3.35

3.76

3.07

4.17

3.50

2.91

2.68

4.19

3.29

3.39

3.27

2.99

4.01

3.29

3.46

2.33

1.58

1.80

3.38

3.46

1. 70

5.88

6.22

10.96

8.35

3.02

.4580

.6872

1.0089

1.0686

.0833

.1368

.8027

.8947

.9384

.7890

1. 1492

1 .2107

1.3616

1.7201

.3406

.7044

.6728

1 .2747

1.3634

.9335

1.1598

1 .3381

2.2182

4.9597

3.5299

1.2378

1.3020

4.2831

.5515

.5320

.2516

.4163

1. 7197

1.2296

3.9549

4.4377

4.1571

.3361

.5927

3.5119

3.0756

4.1963

3.4355

4.8004

2.9552

4.5748

4.9302

1 .6299

2.7482

2.4640

4.5531

4.5059

3.8813

4.2783

4.5900

5.4956

8.4553

6.9034

4.6420

4.8920

7.7757

3.5897

3.6692

3.1813

4.0660

4.7941

(II )

(I)

(Million yen)

{II)/{IJ

2.67

2.68

2.68

5.76

4.40

3.89

4.03

4.33

4.38

3.44

4.47

4.35

4.18

2.44

3.36

2.87

4.79

3.90

3.66

3.57

3.30

4.16

3.69

3.43

2.48

1.70

1.96

3.75

3.76

1.82

6.51

6.90

12.64

9.77

4.36

55

In Table 1, we present the total direct and indirect requirements of imports

due to an increase in demand. The calculation was done in two ways.

Column(I) in

the table shows the import requirements computed by the use of M and the inverse

[I - A + M]-l in (3.11); these figures do not take into account the effects of

show the import requirements for which the effects of endogenous changes in consumption are considered. These figures were calculated by the use of M and the inverse

[I - A + M]-l [I - CH]-l in (3.15).

differs in the two cases:

column(II) it is

f,

imports are relatively more affected by endogenous consumption demand. Similar empirical calculations for total direct and indirect requirements of employment and of

capital (Tables 2 and 3 respectively) show that there are some significant differences in each sector's factor response to endogenous changes in consumption demand.

VI.

Fo.l!JTll.li.a. 60Jr. :the Compu;ta;t<.on 06 :the Subjoined InveMe Showing :the E66ect 06

EndogenoU6 Change.h in COn6ump:Uon

is desirable that the "subjoined inverse" be converted into a form which is easily

computable and revisable.

By our formula we

can renew the subjoined inverse at any time when it is necessary. This convenient

computation formula can also be derived more convincingly by tracing the propagation

process from the initial injections.

1)

A=

(I - A)

= (I

= AB

- A

+ M)-l

= (0 10 2

= L o.

i=l

1-

....

o )'

n

56

C = the matrix of consumption

coefficients

_

n

= a~'a = ~ai=l

L na.

'l- 'l-

then we find

(3.16)

Since obviously 0

<

<

<

(I - CH)D

CHD

n<

1, so that II - CHI = 1 - an

>

O.

D - I.

(3.17)

Because of (3.16), the left side of this equation is (CH)2D = anCHD, and hence

1

CHD = ~l

-- H.

- an

Substituting (3.17) for the left-hand side of the above expression, we obtain

1

-_H

- an

(3.18)

D=I+~l

Thus, taking into account (3.15) and (3.18), our final matrix multiplier is

[(r - c)(r - A)

= B[I +

~l

-- H]

- an

(3.19)

For the sake of completeness, a similar formula for the case of a closed economy with

no foreign trade can be derived as:

[(I - C)(I - A)]-l

= [I - A]-l[I _ C]-l

=

1

B[I + .--'--=C

l - a-]

(3.20)

The above formula (3.19) also can be derived by tracing the propagation process

by the initial injections.

57

let

X:

m

Y:

C :

m

then the income-generating process due to the initial injections f can be expressed

as

2'

1'

Y2 ---->

---->

3'

---->

Denoting by M the diagonal matrix of import coefficients, and by C the square matrix

of consumption coefficients, then

from 1

from l'

Cl = CY l

from 2

Y2 + MX 2

from 2'

C2 = CY 2

from 3

Y3 + MX 3

Cl

}

}

m = 2, 3, ....

(3.2l )

X =AX +Y

m

m

m

Y

= {I - A)X =

m

Axm

(3.22)

{,4 + M)X

ciix

x m = BCiixm- 1

m-

1

m = 2, 3, ....

(3.23)

We wri te the coefficient of the right-hand side of the above equation as BCA =

then

Xl = Bf

Xm

= QXm_l

m =

2, 3,

....

Q,

58

Hence

Xm

= ~-lXl = ~-lBf,

and since

= BCABB- l = B(CH)B- l ,

(an)m-1 Q

m

= 2,

3,

(3.24)

Thus

(3.25)

Since 0

<

an

<

1,

Bf + - 1

l_ii BeHf = B[I +.,.----'-=Cl

1__ HJf

(J

en

PART TWO

INTERNAL AND EXTERNAL MATRIX MULTIPLIERS

CHAPTER 4

INTERNAL AND EXTERNAL MATRIX MULTIPLIERS IN THE INPUT-OUTPUT MODEL *

I.

l~oduction

table are divided into two or more strategic industry groups and the interaction

among these groups traced through.

tions between the goods-producing sectors and service sectors, between the primary

growth sectors and the supplementary or derived growth sectors, and between two

regions which have structurally different characters.

which have ample capacity.

The method employed herein is to partition off the original Leontief inverse in

terms of the combined effects of "internal multipliers," "external multipliers," and

their "induced sub-matrix multipliers."

multiplier model" may well be applied to a wide variety of problems, as the usual

Leontief inverse conveys only the ultimate total effects of interindustry propagation

but not the disjoined effects separating into partial multipliers.

Part Two is an attempt to investigate problems of this type by means of the

formulation of partitioned matrix multipliers and their relationships, and to

empirically apply our formula in two cases:

goods-producing sectors and service sectors in the next chapter, and 2) interregional

* This and the next chapter are revised and integrated versions of articles which

Eeonomie Vol. 7 No.1, June 1966, and in the ame Jo~nal, Vol. 12 No.1, June

1971. The mathematical part of this chapter is a summarized version of Chap. 4

and Appendix C in the author's The Stnuet~ Int~dependenee Analyi 06 an

Eeonomy (in Japanese), 1963, and the empirical applications are from the author's

arti cl e (i n Japanese): "An Interregi ona 1 Input-Output Model and its Appl i cati on" ,

Monthty S~vey 06 Japan Indu.tJU.ai StJw.et~e Intitute. No. 52, Jan. 1965. I have

introduced some improvements in this rewriting.

60

II.

We divide the n industries of the usual input-ourput table into two subgroups,

designated P sector which consists of Z industries, and S sector which consists of m

Then, the n x n matrix of input coefficients is

industries.

Z + m =n

(4.1)

products in the P and S sectors respectively, and Sl and S are submatrices of coefficients showing the input of S sector's products in the P and S sectors respectively.

Among these submatrices,

Since the n x n Leontief inverse

B*

= (I

- A) -1

(4.2)

tells us something about the total ultimate effects only but not about the disjoined

interdependence of the above two activities, we must introduce some device consisting

of partiti oned matri x multi pl i ers.

elements of the Leontief inverse into three aspects of propagation consisting of the

followi ng:

(i)

aspect will be shown as the "internal matrix multiplier" of the p sector (having

order Z x Z):

(4.3)

(ii)

This

aspect will also be shown as the "internal matrix multiplier" of the S sector

(having order m x m):

T = (I - s)

-1

(4.4)

Of course, each internal matrix multiplier does not operate independently under its

61

own impetus, but is able to operate in conjunction with the other sector's industrial

activity.

(iii)

which naturally follow from the operation of internal multipliers Band T:

Bl = SlB ... S-goods input in P sector induced by internal propagation in

B2

= BP l

Tl

= P1T

T2

= TS l

These four sub-multipliers reveal the coefficients of induced effects on output

activities in the cases of B2 and T2 or input activities between two sectors in the

cases of Bl and Tl , and are ca 11 ed the "producti on-generati ng process in successi on."

(iv) The above three aspects of the interaction process naturally lead to

another intersectoral multiplier that we could call the "external matrix multipliers"

of the P and S sectors according to their economic meanings.

If we select the

coefficients of the induced effect on production (i.e., B2 and T2 ) as the base, then

they will take the form

(4.5)

or alternatively

(4.6)

Of course L, the external matrix multiplier of the P sector, has the order txt,

and K, the external matrix multiplier of the S sector, has the order m x m, because

62

(v) Now then, we have arrived at the fact that the total of the propagation

effects in the P and S sectors' industries, each generated by its own sector's

activities, are expected to take the values

LB

and

if we assume

LB

=N

B*

or

= (I-A}-l

l

.[

B + Btml

B-!d

MEl

NTl

T2N

T + T~Tl

(4.7)

l.

(4.8)

= (I -

A}-l

in terms of the combined effects of internal and external matrix multipliers and

their induced sub-matrix-multipliers.

effects in both P and S sectors, originated each in its own sector's activities, can

be written in the additive 6orom B + Btml or T + TzNT l as well as the muttpiied 6orom

1) Another formul ati on of the "external matri x multi pl i ers" based on the coeffi ci ents

L = (I - T1Bl}-1

(Z x Z)

(4.5)'

(m x m)

(4.6) ,

and

where K has the order m x m, and L has the order Z x Z.

The existence of these inverses (external multipliers K, L, K and L) as well as

the existence of internal multipliers (B and T) is warranted by the existence of

the original Leontief inverse matrix.

For the existence of a meaningful solution for Leontief model and the properties

of Leontief-type matrices, see Chapter 1, Section IV, l}.

63

LB or KT. 2), 3)

The proof of the formula (4.7) is as follows:

I B,?!] [ I - P I -Pl ]

M L -Sl

I - S

[ B + Btml

MBl

= r~]

L~

= I + B'?!SlB(I - p) - BzMSl

=I

= I + B'?!Sl - B'?!Sl

MBl (I - p) - MS l

= MS1B(I - p) - MS l

=

MS l - MS l =

2) Using the notation in note 1), we can prove the following identities:

KT=TX=M

LB=BL=N

that is, the internal multiplier potmutti~ed by the external multiplier is also

possible as well as the p~em~ptled expression.

The proof of the latter identity is that:

LB = (I - B2T2 )-lB = [I +

m=l

because

and

m=l

.1.1

m~

= B2(I - T~2flT2 = B~T2 = B~Sl = B'?!Sl

Y(T1Bl)m = m=lY(P1TS1B)m

m=l

Pl(TS1BP1)m-1TS1B = Pl [ (T~2)m]TBl

m=l

m=O

= Pl(I - T2B2)-lTB l = P1KTB l = P1MB1

=

So, we obtain

LB = (I + BzMS1)B = B + BfD31

= B(I + P1MB1 ) = BL.

In exactly the same manner, we get

KT = XX = M.

3) For the equality between the multiplied and additive forms, see the equation (*)in

note 2) above.

64

- B2 - B2XT 2B2 + B2XT(I - S)

- B2 - B2XT 2B2 + B2X

- B2[I - X(I - T2B2 )]

=-

B2(I + XT 2B2 -

x)

=0

- MB1P l + M(I - S)

- XTB1P l + KT(I - S)

(vi) The divided matrix means that we use the following system:

x = PX

P

+ P1X + F

s

P

= SlXP

(4.9)

+ SX + F

s

sector's industries, and F ,F are the final demand vectors of the P and S sectors

p

respectively.

or

][~l.

The partitioned intersectoral activities may be viewed in two ways:

(4.10)

(a) The

first expression of the formula (4.10) shows it from the perspective of the P sector

and (b)

the second expression shows the same fact from the perspective of the S

sector.

to a variety of problems.

One more alternative expression of the Leontief inverse in terms of partitioned

matrix multipliers is

65

B*

__ t_=LB_+-L__

BKTT-=-l:. . . ]

= (I - A)-l = --:::LB~+-L-::B:=2T_]

~KT_B

'"

KT

KTB1

4.11)

We can easily prove the identity between this expression and equation (4.10).4)

Mathematically, our formula also provides us with a method of working with lower

order matrix-calculations, which is especially useful when the inversion of matrices

of high order is not suitable for available computational equipment.

II 1.

An empirical application of our model is made for the interregional-interindustry data of the Japanese economy. The main purpose of the interregional

input-output model developed by Isard, Leontief, Moses, Chenery and others,5) is to

analyze the interrelations among trade and production in two or more regions. Our

interna1-and-externa1 matrix multiplier model, in a somewhat extended form, may be

more useful for this purpose, because the inverse of the usual interregional

input-output model depict only the ultimate total effects but not the disjoined

effects separating into interdependence between each regions internal and external

multi p1 iers.

One example of an interregional input-output table is the data published by the

Hokkaido Development Bureau which divides the Japanese economy into two regions, each

having the same number of industries (30 industrial sectors).

In terms of our

formula (4.7), we let the P sector be Hokkaido and the S sector be the Rest of Japan.

For convenience we call the latter region Honshu, the main island of Japan. Of

course, Z = m = 30, and n = 60.

Table 1 is concerned with the internal and external matrix multipliers in each

4) For example, the identity KTt

is shown as follows:

T2N

in which I +

= T2N

Tt~

T2N

= K because

(I - Tt2)K

= I, so we obtain

5) See, W. Isard [22], W. W. Leontief [29], H. B. Chenery [5] [6], L. N. Moses [38].

66

region.

However only the column sum or row sum of the elements of the matrices are

of dispersion" of industries in each region, and the row sum measures "the sensitivity of dispersion" for industries in each region.

As shown by the figures in the Table, the internal propagation in Hokkaido (B)

has a multiplier effect of 1.77 on the average, and it evokes in turn a round-about

external repercussion through Honshu's industrial activity (L) of about 0.7%-up

effect on the average, so that the total effect is equal to 1.77 x 1.007

the average.

= 1.782

on

considerably higher 2.53, but the round-about external multiplier (x) shows only a

0.3%-up effect on the average.

industrial activity according to its role in the national economy.

To see this point more clearly, dividing the elements of internal multiplier of

Hokkaido

(30 x 30) by the elements of the appropriate (30 x 30) part in Leontief

inverse B* , we obtain the values which may called "inside propagation ratios" of

Hokkaido's industries. Although the table of the calculated figures is omitted, from

it we find that the most self-sufficing industries in Hokkaido are those in the light

industry group such as textiles, rubber products, leather and leather products,

printing and publishing, miscellaneous manufactures, and those in the non-manufacture

group such as services, trade, public utilities.

The industries in this category are relatively independent of Honshu's industrial

activity, and their "inside propagation ratios" all take values more than 0.9.

At

industrial activity.

non-ferrous metal products, and the resourse industries such as metal mining,

non-metal mining, pulp, paper and paper products, fishing, etc.

Such internal propagation patterns, together with the external input patterns of

interindustry activity in each region, depict the characteristics of interregional

repercussions whose estimated results are summarized in Tables 2 and 3.

In these

67

TABLE 1

SUMMARY

TA~LE

Internal

External

Internal

External

multiplier of multiplier of multiElier of multiElier of

Hokkaido, B Hokkaido, L Honshu T

Honshu K

row

Icolumn row

Icolumn row

Icolumn row

Icolumn

sum

Isum

sum

Isum

sum

Isum

sum

Isum

2.0757 1.5281 1.0053 1.00142.1371 2.0574 1.0016 1.0073

Public utilities

1.5973 1.5558 1.0103 1.0033 1.4232 1.8264 1.0041 1.0015

Metal mining

1.1008 1.5049 1.0010 1.0051 1.2693 1.4445 1.0005 1.0006

Non-metal mining

1.3339 1.9988 1.0013 1.0077 1.7521 2.2020 1.0017 1.0001

Petroleum and natural gas

2.5418 1.4247 1.0269 1.0040 1.7799 1.83841.0013 1.0007

Coal mining

1.7938 2.1285 1.0074 1.0017 2.5493 2.4767 1.0036 1.0025

Processed foods

Textiles

1.2630 1.5018 1.0012 1.00583.9697 2.9991 1.0069 1.0014

1.4638 2.0173 1.0021 1.0001 1.5687 2.7364 1.0006 1.0009

Saw-mill and plywood

Pulp, paper and products

2.1617 2.2074 1.0170 1.0037 3.1503 2.9812 1.0050 1.0056

Chemicals

1.84641.9450 1.0058 1.00484.2311 2.9287 1.0069 1.0026

Coal products

1.5500 2.2040 1.0073 1.0011 2.3138 2.4280 1.0052 1.0103

Rubber products

1.0272 1.5886 1.0000 1.0054 1.2967 2.0640 1.0014 1.0007

Leather and products

1.0242 1.2081 1.0000 1.0126 1.1281 2.9118 1.0001 1.0011

Nonmetallic mineral products 1.1340 1.8448 1.0007 1.0050 1.4833 2.4099 1.0015 1.0030

2.8235 2.7949 1.0626 1.0028 5.3194 3.8007 1.0163 1.0066

Iron and steel

1.0109 1.7924 1.0031 1.0093 2.0035 2.9756 1.0028 1.0108

Nonferrous metal products

Steel products

1.0922 1.3679 1.0005 1.0637 1.4305 3.0454 1.0027 1.0032

Machinery

1.0824 1.8586 1.0015 1.0267 1.8852 2.9986 1.0069 1.0010

Lumber and products

1.1370 1.9050 1.0008 1.0044 1.14082.5479 1.0002 1.0044

Printing and publishing

1.1219 2.0063 1.0003 1.0061 2.21982.7236 1.0016 1.0100

Miscellaneous manufactures 1.0409 1.7745 1.0000 1.0045 1.2726 2.9778 1.0015 1.0009

Forestry

2.5630 1.2480 1.0057 1.0008 3.4962 2.0360 1.0016 1.0001

Fishing

1.5319 1.9547 1.0026 1.0061 1.4503 2.2795 1.0002 1.0162

Agriculture

2.5916 1.4334 1.0097 1.0011 3.3701 1.7911 1.0047 1.0009

Dummy sector

2.1319 1.6158 1.0063 1.0113 4.8711 2.8317 1.0061 1.0007

Service

3.0585 1.4978 1.0046 1.00204.3531 1.8817 1.0030 1.0014

Business consumption

2.2541 2.4622 1.0047 1.0029 2.4325 3.1556 1.0016 1.0012

Trade

2.2341 1.4880 1.0069 1.00083.6191 1.9028 1.0031 1.0000

Transportation

2.6468 1.5602 1.0095 1.0046 2.1017 2.1303 1.0024 1.0017

Undistributed

2.8650 1.68181.0056 1.0018 4.7226 3.3584 1.0045 1.0018

(Average)

--------------------~------------------~--------------.----

68

form for both the column sums and the row sums of the four sub-multiplier matrices

B2 , T2 , Bl and Tl

Industries listed are only those having higher values than the

average.

The sub-multipliers B2

= BP l and

T2

production activities in each region induced by the input activity in the other

region.

industries, the elements of the multiplier T2 have higher values than those of the

multiplier B2 , with an average value of 0.3806 versus 0.0159. A similar situation is

found in the comparison between Bl

= SlB and

Tl

ment effects of one region on the other, where the average value for Bl is 0.1847

versus 0.0207 for T l . These results suggest that a development program centered in

Hokkaido will give rise to many leakages in the interregional production process and

will generate much benefit to Honshu's industries.

We cite here one specific example of the nature of the regional industrial

interrelationship:

by Hokkaido's input is the extremely high row sum value of 2.303 as shown in Table

2-(a). This high value has its origin in Hokkaido's industries such as steel

products and machinery as shown the column sum figures in Table 2-(b). Of course,

to understand the cross-effects of this sort in detail, it is necessary to trace

back the source of the elements in the underlying matrices themselves instead of

simplying examining column sum or row sum values.

In any case, analyses of the above sort should playa role elucidating the

inherent properties of inter-and-intra regional industrial relationships, and we may

expect a fruitful application of this method (combining the extended model in the

next section) to the comprehensive data of the Japanese interregional input-output

table compiled by the Ministry of International Trade and Industry. This will enable

us to study the patterns of industrial interrelations among the nine regions of the

Japanese economy.6)

6) A report on this MITI 9 blocks-interregional input-output table [24] that took _

t~ree years of preparaEion_was published in 1967.

The nine regioDs are Hokkaido,

Tohoku, Hokuriku, Kanto, Tokai, Kinki, Chugoku, Shikoku and Kyushu.

69

TABLE 2

SOME COEFFICIENTS OF INDUCEMENT TO PRODUCTION

PER UNIT OF INPUT IN THE OTHER REGION *

(a) Row sum of elements of T2

Honshu's industry

Iron and steel

Textiles

Chemicals

Agriculture

Machinery

Metal mining

Leather and products

Coa1 products

Pulp, paper and products

(Average)

Hokkaido's industry

2.3033

.8631

.8006

.5751

.4907

.4317

.4097

.4016

.4016

.3806

Hokkaido's industry

Coal mining

Pulp, paper and products

Iron and steel

Forestry

Transportation

Fishings

Agri cu 1ture

Processed foods

Trade

(Average)

.0812

.0614

.0448

.0284

.0277

.0267

.0252

.0208

.0165

.0159

Honshu's industry

Steel products

2.2120

Leather and products

1.2278

Machinery

1.0868

Nonmetallic mineral products .8064

.6211

Textiles

Miscellaneous manufactures

.4637

Rubber products

.3936

(Average)

.3806

Coal products

Fishing

Iron and steel

Public utilities

Lumber products

Pulp, paper and products

Nonmetallic mineral products

Steel products

Processed foods

.0577

.0520

.0502

.0419

.0374

.0357

.0319

.0255

.0211

.0168

(Average)

.0159

* Sectors listed here are the industries having row sum or column sum values

higher than the average.

** Table (a) or (c) lists the names of the industry receiving the induced

effects, and (b) or (d) lists the names of the industry giving the induced effects.

70

TABLE 3

SOME COEFFICIENTS OF INDUCEMENT TO INPUT BY

INTERNAL PROPAGATION IN THE OTHER REGION*

(a) Row sum of elements of Bl

(Average)

Hokkaido's industry

Honshu's industry

Iron and steel

Machinery

Chemicals

Textiles

Leather and products

Processed foods

Metal mi ing

Agriculture

Coal products

Pulp. paper and products

Stee 1 products

(c)

1.0728

.5409

.4335

.4243

.3962

.3675

.3232

.2978

.2906

.2396

.2349

Coal mining

Pulp paper and products

Iron and steel

Processed foods

Transportation

Fishing

Agri cul ture

Nonmetallic mineral products

.1521

.1034

.0865

.0462

.0339

.0336

.0241

.0214

.1847

(Average)

.0207

Hokkaido's industry

Honshu's industry

Steel products

Nonmetallic mineral products

Leather and products

Machinery

Textiles

Miscellaneous manufactures

Fishing

Nonferrous metal products

Chemicals

.6243

.4534

.4517

.3721

.2629

.2387

.2354

.1960

.1951

Coal products

Printing and publishing

Fishing

Pulp, paper and products

Public utilities

Nonmetallic mineral products

Steel products

Lumber products

Nonferrous metal products

.0474

.0451

.0427

.0410

.0368

.0353

.0320

.0303

.0275

.0212

(Average)

.1847

(Average)

.0207

* Sectors listed here are the industries having row sum or column sum values

higher than the average.

** Table (a) or (c) lists the names of the industry receiving the induced

effects, and (b) or (d) lists the names of the industry giving the induced effects.

71

IV.

Some Ex.:telt6ioY/-6

06

the Model

The model suggested in this chapter may be extended in two directions. The

first direction is an extension of the input-output model in an "intensive" manner.

The other direction is an extension of an "extensive" nature where the input-output

model is used in conjunction with various other models such as the macro-econometric

model, the linear programming model, and so forth.

concerned with intensive type extensions, and we limit our interest to the following

two cases.

1)

06

PaJrA:.Ui..Orted GJLOUp.6

larger number of partitioned industry groups (or regions), that is, the two-partition model can be expanded to three or more partitions.

procedure of dividing the model into a large number of industry-groups (or regions)

tends to degenerate into formalism, or is apt to be too complex.

to too much form at the expense of the empirical spirit. 50, we prefer to employ

"a method of localizable partition" in which the redivision of groups is limited to

some particular strategic parts of industries (or regions).

The procedure of the extension employed here consists of two steps.

The first step is the re-partition of some "internal matrix multiplier",

step 1.

If we redivide the

5 sector into two sub-sections designated section 5-1 and section 5-2, it will lead

to the repartitioned matrix of input coefficients as follows:

p

sector

p

-~

A -

Uo

Vo

5 sector

f-ls::2

aO

vl

al

ul

v

)z

)j

)k

j +k = m

Z+m= n

(4.12)

From the above coefficient matrix, we get the following relationships for the 5 sector's industrial activities:

72

ii)

= (I

- u)

= (I

- v)

-1

-1

xk

(4.13)

(4.14 )

production between sections 5-1 and 5-2 inside the 5 sector;

Qu l

=a

j Xk

(4.15)

Rvl

= Il

(4.16)

iii) Localized external multipliers of section 5-1 and 5-2 inside the 5 sector (i.e.,

the meaning of "external" in this case is limited to within the 5 sector and

not beyond it);

U = (I - as)-l

V

= (I

- Sa)-l

(4.17)

(4.18)

k Xk

Then, according to the formula (4.11), we have the internal multiplier of the whole

5 sector in the redivided form, i.e.;

T

= (I

sf

-u l ]

[I = -Vl I I - v

U

-1

rLVSQ

UQ I UaR J

VR:J

(4.19)

multipliers into the relationships including the interaction between P and 5 sectors.

The pattern of this inter-and-intra sectoral relations is given by the following

Chart.

In this Chart, E, Q, R inside the three circles denote the internal multipliers

of the P sector, 5-1 section, 5-2 section respectively. L, U, V outside the circles

denote the external multipliers of P sector, 5-1 section, and 5-2 section respectively.

<P sector>

<5 sector>

section

5-1

section

5-2

73

With the aid of this Chart, we get six routes of inter-and-intra sectoral inducement relationships shown as follows:

(a)

(b)

(c)

<order of matrices>

<sub-multipliers>

<inducement routes>

5-2 -> 5-1

a.

= Qu l

j x k

fl

= Rvl

P -> 5-1

a = Q(u O + U1Rv O)

xZ

P -> 5-2

, = R(V O + V1QuO)

k xZ

5-1

A = B(aOU + alVRv l )

Zx

->

5-2 -> P

Zxk

= B(alV + aOuQul)

The formation of these six sub-multipliers showing induced effects on production activity may be easily verified by tracing the repercussion routes between the above

sectors or sections in the Chart.

We have now arrived at a formula of the partitioned matrix multiplier, in this

case, which can be stated as follows:

[ LB

or

=

LAQ

LB

UaLB U(I + aLA)Q U(a. + aLIl)R

V,LB

L~R

V(fl + ,LA)Q

V(I +

,L~)R

(4.20)

The main course of the derivation of the formula (4.20) is that the system

X = PX + a_X + alX + F

P

P

(ru

v

p

{

Q)

+ FU

XU

(4.21 )

can be solved in a partiality form for the production level of the 5 sector (regarded as equations

The result is

74

[:: 1

Va

UQ

UaR

Vt

Vf3Q

VR

(4.22)

substituting this equation into (!) and collecting terms gives the formula (4.20).

By this formula, we see that the external (not localized) matrix multipliers of

sections S-l and S-2 are equal to UtI + aLA) and V(I + tL~) respectively.7)

There are two advantages in applying this formula to practical problems.

First,

the number of industries in each partitioned sector (or section) may not necessary be

the same (i.e., Z ~ j

k), and secondly the above treatment can be adapted for the

further subdivision of the particular part of strategic sectors or sections in succession, so we get a method of studying the various characters of industry groups

(or regions), say, according to their differing roles in the national economy.

2)

Inclu6ion

PJtoc.e,6~

The next extension of our model is the inclusion of the income generation process which is omitted in the usual input-output model. This omission is justified

only if the level of income and its use do not depend on the composition of production, because in this case a disaggregation of income generated by sector will add

nothing to an analysis of the aggregated Keynesian type.

The location of production depends on the location of consumption, and the latter

cannot be determined separately from the calculation of the income generated in each

region.

In some studies, such as Chenery's Italian regional model ,B) the household sector

is transferred to the processing sectors from exogenous sectors and is regarded as an

industry whose output is labor and whose inputs are consumption goods.

But a more

in Chap. 2 of Supplement Part of MITI [24].

8) See H. B. Chenery [5], or H. B. Chenery and P. G. Clark [7], Chap. B.

75

production activity, but to introduce the consumption function of a Keynesian type in

a disaggregated form. g ) As was shown in Chapters 1 and 3, this latter procedure

means, by implication, combining the Leontief propagation process and the KeynesianKalecki propagation process in a disaggregated form. 10 ) By such method the role of

income formation is taken out from the output determination in a separated and

exposed form which is indistinguishable in the usual standard models.

formation side is found in the above Report [24] noted in the footnote 7).

10) Some comments on Chap. 3 (K. Miyazawa [32]) for regional aspects are found in

R. Artle [1]. The discussion in Chap. 1 furnish a reply to the comments.

CHAPTER 5

AN ANALYSIS OF THE INTERDEPENDENCE

BETWEEN SERVICE AND GOODS-PRODUCING SECTORS*

I.

rntAoductio~

There are two opposing views regarding the relationship between the

goods-producing sector and the service sector, and this divergence of views has

some relevance in light of the recent growth of service sectors in some advanced

economies.

goods-producing activities; the income of the former is seen as derived from the

income of the latter, i.e., a "redistribution of income" originated with

goods-producing activities.

The distinction between "productive" and "unproductive" labors employed by Adam

Smith, and the concept of surplus value employed by Karl Marx, are some of the

earliest expressions of this orthodox view.

many services yield utility as goods and thus have value in terms of the exchange

mechanism of the national economy.

Modern economics emphasize the demand aspects by its reliance on the concepts

of utility and exchange, whereas the orthodox view stresses the supply aspects by the

importance it attaches to the production-relationship. The contrast between the two

views is thus very clear:

services, while the orthodox economics laying weight on the two-dimentional relation

in production and service activities.

These differences have been reflected in the oppos i ng "nati ona 1 economi c

accounting systems" of the present day.

ya.te UMVe1[,6Uy, No. 92, August 1970 and HUouubMYU JOM~a.t 06

EQOMmiM, Vol. 12 No.1, June 1971, and is reproduced here with some additions.

The author is indebted to Professor H. T. Patrick for his encouragement and advice

in preparing the original paper, and to A. S. Bha11a and Y. Shionoya for offering

valuable discussions.

VL6QUA-6-i.o~ Pa.p~,

77

National Accounts of the United Nations, employed for the economic accounts of many

capitalistic countries, includes both income from service activities and income from

goods-producing activities as part of the National Income.

countries, does not include service income as part of the National Income or National

Product.

The one-dimensional approach to the income-concept adopted by SNA is superior in

the broad treatment of problems.

service activities have an internal relationship rather than a parallel one, we must

take this into consideration together with the modern economic view.

In this chapter we shall present some linkage for the gaps just described and

shall formulate the interdependent models of the goods-producing sector and the

service sector both by methods of income analysis and of input-output analysis with

some tentative empirical illustrations.

II.

Denoting by Y the national income defined by the usual SNA concept, we divide Y

into two components:

Yp '

Y=Y

(5.1)

+Y

where Yp may be regarded as the national income defined by the MPS concept.

If we

define q as the propensity to consume service and ignore the intermediate services

for simplicity, then the demand for services, i.e., qY, must be equal to the supply

of services in equilibrium and we have

(5.2)

Substituting (5.1) in (5.2), we get

Y =~.y

s

1 - q P

(5.3)

This equation (5.3) demonstrates that the level of service-income Ys depends on two

factors:

services.

78

The first factor reflects the correlation of the level of service activities

with the level of goods-producing activities so that the latter determines the former as argued by the orthodox economists. As shown by the equation, service

activities will expand with a higher level of activities in goods production. The

second factor reflects the structure of demand as asserted by many modern economists.

Since the income-elasticity of demand for services is greater than that for goods,

the degree of growth in the service sector would depend on the order of increase in

the propensity to consume services. Higher propensity would generate a higher level

of service activities.

The form of expression (5.3) is very similar to the Keynesian multiplier

equation, and in effect we can interpret it to be the result of the propagation

process caused by the goods-producing activities through the expenditure of income.

Justification for this assertion is as follows.

propensity to save

investment ex

po~t;

plus the

Given

po~t.

income from

goods-production

Y supply

of good~

II

demand .J

for goods

<total>

= _8_ y

savi ng

1 - q

consumption

of goods

:~/;~/~r:P

tit i t

consumption

of services

income from

service activities

national product

p]

=_p_y

Y=Y

+Y

=Y

+ P

--Y

l-qp

=Y

1 - q P

Y

demand for

1 - q pservices ~

= -fl-

2

3

-fl- Y

Y = qY + q Y + q Y +... = 1

8

-q P

supply of

services

II

+-fl-y =_l_y

1 - q p

1 - q P

Of course, the convergence conditions are generally satisfied by the assumption that

the value of q is less than one.

We could define the multiplier

79

multiplier equation may be one way of synthesizing the orthodox view of the relationship between goods and services with the modern Keynesian expenditure viewpoint.

In any event, the growth of the service sector must be explained in terms of both

demand and production.

The last line of the above table, i.e., the equation on national product,

y = ___1___ y

1 - q p'

(5.1).

income defined by SNA (i.e., Y) and the national income defined by MPS (i.e., Y ).

P

Some popular explanations for growth of the service sector in recent years are

often expressed in terms of employment rather than in terms of income.

Our formula

(5.3), expressed in terms of the income base, could be transformed into the employment base so that

L

--11- :.: L

1 - q YB P

(5.4 )

where LB ,Lp are levels of employment in the service sector and in the goods-producing

sector respectively, and

Y

YB-..lL

-L'

B

-...l2.

p-L

According to A. S. Bhalla,l) attempts to explain the relatively faster growth of

employment in the service sector have followed three main approaches, namely:

income and expenditure approach, (ii)

approach.

(i)

employment

,is a demand factor that reflects the

- q

value of propensity to consume services, and therefore the degree of income-elasticities in demand for services.

1) A. S. Bhalla [3J.

2) C. Clark [lOJ.

80

relatively slower growth of productivity in the service sector, as pointed out mainly

by V. Fuchs. 3 ) And the third element,

L ,

Galenson. 4 ) These conventional explanations of employment growth in the service

sector are often considered in isolation rather than in conjunction with each other,

as formula (5.4) now enables us to do.

Let us now return to formula (5.3), expressed in terms of incomes, in order to

examine its character and economic meanings.

(i)

independent of the multiplicand Y ; similarly, the multiplier formula, in general,

p

tisement and information, and the sum of these expenditures by firms influences the

value of q, or according to K. Galbraith, there are "dependence effects" or a shift

from "accepted sequence" to "revised sequence" in the relation between demand and

production in the market-place. 5) In a comment on Galbraith, R. Solow points out the

possibility that the effects of advertising by various firms may offset each other. 6 )

Still, we cannot overlook the existence of such effects.

3) V. Fuchs [13].

4) W. Galenson [15].

5) J. K. Ga 1bra ith [14], ch. [19].

"The unidirectional flow of instruction from consumer to market to producer may be

denoted the Accepted Sequence" (p. 221). " ... the accepted sequence is no longer

a description of the reality and is becoming ever less so. Instead the producing

firm reaches forward to control its markets and on beyond to manage the market

behavior and shape the social attitudes of those, ostensibly, that it serves. For

this we also need a name and it may appropriately be called The Revised Sequence"

(p. 212).

6) See R. M. Solow [48], p. 105.

81

o~g~nating

in the goods-produc-

neeeived in the same industries.

information, but also interest costs, rent, transportation, insurance rates, etc.

These costs are transferred from the goods-producing sector to the "tertiary sector"

as income. The increasing trend of such income-transfer coincides with the fact that

growth in the goods-producing industries reflects the increased activities in the

service sector.

Then, denoting by

the service sector, and by Y; income 4eeeived in the goods sector, we get

Y'

=Y

- T

(5.5)

Here Yp is income as defined by the MPS concept, whereas Y'p is the income of the

goods-producing sector in the usual sense employed by national accounts in capitalistic countries. Denoting by Y'8 the income of the service sector in the ordinary

sense, namely, on an income received basis, we have

= Y8

Y'8

+T

(5.6)

So, if we let

_ T

a - Y'

'

(5.?)

Y'=~Y'

8

1 - q p

(5.8)

This revised formula (5.8) is expressed in terms of an "income-received basis,"

and not an "income-originating basis" as was the case of the previous formula (5.3).

In this new expression, the fundamental assumption of independence between the components of the multiplier and the multiplicand may be supported.

parameter

An increase in

namely,

8

82

If we adhere to the income-received basis, the equation of the growth of service

employment must also be rewritten as follows:

L

=~

~

1 - q y'

(5.9)

y'

, _ s

Ys - L

s

'

y'

y'=-.R

L

P

respectively.

The tendency toward increase in the parameter a is illustrated by Table 1, which

is due to M. Shinohara. 8 ) Figures in Column (a) of Table 1 indicate the gross valueadded in manufactures according to Industry Census Statistics, where manufactures'

income is on the income-originating basis.

manufactures' income is on the income-received basis. The trend of increasing

discrepancy in both sets of figures clearly discloses one reason for the growth of

the service sector in recent years. 9 )

It may be worth noting that the recent growth tendency of service sectors is

usually calculated on an income-received basis and not on an income-originating

basis.

Consequently, if we choose the latter rather than the former, namely (5.3)

would be larger than that which is usually estimated.

(iii) Third, the relationship between the growth of the service sector and the

activity level of the goods-producing sector (i.e., the formula (5.8)) suggests that

the latter determines the former, but this may represent only one side of the

problem.

and we have a = S/(l - s).

P

9) The value of a may be obtained by the expression a

fE+ - 1.

83

TABLE 1

DISCREPANCY IN MANUFACTURES' INCOME

BETWEEN INDUSTRY CENSUS AND INCOME STATISTICS

in manufactures

(by Industry Census)

(b) Income of

manufactures

(by Income Statistics)

-ffi-

1952

13,000

11 ,629

89.5

11.7

1953

16,864

13,092

77.6

28.8

1954

18,959

15,358

81.0

23.4

1955

20,986

15,348

73.1

36.7

1956

25,437

18,575

73.0

36.9

1957

29,522

24,082

81.6

22.5

1958

31,748

24,556

77 .3

29.3

1959

38,467

27,138

70.5

41.8

1960

50,348

36,390

72.3

38.3

1961

61,898

44,257

71.5

39.8

1962

71,505

49,815

69.1

44.7

1963

81,709

55,509

67.9

47.2

1964

94,619

63,935

67.6

47.9

Date

(l

** Figures in column (a) show the manufactures' income in "income-originating

base," and those in column (b) show the manufactures' income in "income-received

base."

*** Column (l is an addition by the author.

(l = {(a)/(b)} - 1.

84

The other side, showing that service activities determine the level of

goods-producing activities, also exists, particularly if we take into account the

development of information-service industries in recent years.

The importance of

regard them as merely an accessory of goods-producing activities.

Rather we must

economic activity.

problem to future work lO ) and instead consider the twofold interaction between these

sectors from some other standpoint.

(iv)

Fourth, the approach to income analysis manifested in (5.3) and (5.8) has

one crucial limitation, namely, services are treated only as final products.

If

services did only constitute final products, then we could legitimately condust our

analysis in income terms.

societies.

between final and intermediate services as well as between the goods and the

services sector. ll )

The next section presents a tentative approach to this problem based on an

input-output analysis.

10) See the next footnote 11).

11) In the newest Japanese 1970 Input-Output Tabl~ published in 1974, an

enlargement of sector classification is introduced for the analytical purpose

on service activities. "The sector classification ..... could be used for the

input-output analyses on the recent radical change of the industrial structure,

especially on the expansion of service industries, on so-called system

industries such as information industries, housing industries. The increased

numbers of row sectors and column sectors were about 70 and about 60

respectively comparing with the [465 x 341] sector classification for 1965."

(the Repo~, English edition, p. 62).

We may be expected a fruitful application of the method developed in the next

section to this comprehensive data.

85

III.

Chap. 4 a formula of partitioned matrix multipliers depicting the interaction among

two or more strategic industry groups.

off the original Leontief inverse in terms of the combined effects of ninternal

multipliers," "external multipliers," and their "induced sub-matrix multipliers."

Such an "internal-and-external matrix multiplier model" is appropriate for our present problems, as the usual Leontief inverse conveys only the ultimate total effects

but not the disjoined effects separating into partial multipliers.

At the risk of

being too repetitive, we summarize the results of our theoretical ideas and then

discuss the results of two empirical studies dealing with the interaction between the

goods-producing and the service sectors.

1)

We divide the n industries of the usual input-output table into two subgroups

designated P sector, i.e. goods-producing sector which consists of Z industries, and

S sector, i.e. service sector which consists of m industries.

=

PX + P1X + F

P

= SlX

SX

(5.10)

8,

where X ,X are output vectors and F ,F are the final demand vectors for the P and

p

S sectors respectively.

ways:

(a) the first expression of the formula is from the P sector's viewpoint and

As shown in Chap. 4,

where

= LB,

t;: 1

[T;N T:T~2NT j

= KT, in which

= (I

prl and

(5.11)

= (I

86

intersectoral propagation activities between the P and the S sectors' industries, are

The first empirical application of our model utilizes the interindustry data,

consisting of 50 goods-producing industries and 4 service industries, of the Japanese

economy published by the Japanese Government under the cooperation of the Economic

Planning Agency and five other Ministries (the t1inistry of Agriculture and Forestry,

the Ministry of International Trade and Industry, the t1inistry of Construction, the

Statistics Bureau of the Prime

Agency).

t~inister's

Oividing the elements of the internal matrix multiplier of the goods-producing

sectors

(50 x 50), calculated from the above equation, by the elements of the

obtain the values which may be called "the inside propagation ratio of goods-producing sectors".

Those industries having many higher value ratios are the less service-dependent

industries, and vic.e. ve.Ma.

Table 2 is a summary version of this empirical test, and shows industry-categories of goods-producing industries by degree of dependence on service activity.

Those in category A have characteristics which make them relatively independent of

service activity, while those in category D are at the other extreme.

Roughly

dependency on the service sector.

In group A, the "inside propagation ratios" of each industry take values predominantly more than 0.9 (in A-l group), or more than 0.8

Those in Group B have ratios in the range of 0.7

spread far and wide in the range of about 0.5

0.9.

87

TABLE 2

INDUSTRY GROUPS BY DEGREE OF DEFENDENCE ON SERVICE ACTIVITY

Groups

Basic chemicals, Non-metallic minerals.

Group A

crude steel, Metallic ores, Non-metallic mineral products.

3 Rolled steel, Natural fibre yarns, Coal and lignite, Non-ferrous

metal ingots, Chemical fibre yarns, Metal products, Forestry,

Coal products.

Group B

Group C

Group D

forging, Miscellaneous crops.

2 Primary non-ferrous metal products, Saw-mills and plywood,

Chemical fertilizers, Fabrics, Rubber products, Pulp.

Leather and leather products, Livestock, Furniture and wood

products, Rice, wheat and barley, Electric machinery and

equipment.

2 Starch, sugar, seasonings, etc., Miscellaneous textile products,

Crude petroleum and natural gas, Paper and paper products,

Miscellaneous processed foods, City gas and water services,

Repair and maintenance of machines, buildings and structures,

Petroleum products.

Rice and barley polishing and grain-flour mills, Miscellaneous

manufactures, Fisheries, Printing and publishing.

2 Drugs, soap and cosmetics, Transport equipment, Manufactured

tobacco and beverages.

excludes the dummy industries such as Business consumption, Office supplies,

Scraps, and Undistributed.

** Service sectors other than the above goods-producing sectors are Wholesale

and retail trade, Transportation and communication, Real estate and ownership of

dwellings, and Banking, insurance and services.

*** The order of listing is that the industries in Group A are the most

service-independent sectors, and those in Group D are the most service-dependent

sectors.

ratios in the C-2 group concentrate in the 0.7

0.8 range.

~

The rationale for the above industrial differential-pattern may be traced to

the difference between the values of the elements in the 50 x 50 part of the

88

Leontief inverse B* and the values of the elements in the internal matrix multiplier

B, which is equal to BzMB 1 as is shown in the formula.

By turning our attention to Tables 3 and 4, we can ascertain what goods-producing industries have more inducible power for service activity (see Table of values

for B1 ) and what service industries have more inducible power for goods-producing

activity (see Table of values for B2).

particular interest:

B1 in propagation activity.

could be counted on the fingers of both hands (excluding the Undistributed sector),

while in Table 3 (B 1 ), values of more than 3% are numerous.

inducible power of one sector to another is more powerful in the case of the goodsproducing sector than in the case of the service sector.

Tab1es. 12 )

Of course, from the viewpoint of the goods-producing sector, the sub-multiplier

B1 operates on that sector only in an indirect manner in the sense that it needs a

elements of

K,~nd T

The values of

elements in the internal multiplier T are somewhat higher than those in the external

multiplier K (except Real estate's column), but the difference between the values of

these two multipliers is not so large.

12) One comment is needed because of the weakness in the data of the service sector

which leads to the estimation errors in the original Leontief inverse matrix. If

this data weakness is not negligible, our method must be reread in such a way

that the proportion of errors in the elements of the Leontief inverse is actually

due to a shortcoming of the service sector's data. For example, the reliability

of the inverse-elements may be judged by means of Table 1 such that those in

Group A-l are the most reliable and those in Group D-2 are the most unreliable.

89

TABLE 3

COEFFICIENTS OF SERVICE-INPUT INDUCED BY INTERNAL PROPAGATION IN GOODS-PRODUCING SECTOR*

(unit: 10 -6 )

B'l = (81B)'

TranSJX)rtaBanking,

tion and Real

Insurance

Sector

Trade Communi

ca- estate and

tion

Servi ces

28382

10876

12243

Rice, wheat and barley

347

18595

15910

50790

614

Miscellaneous crops

61239

27121

24374

897

Livestock

13509

10888

1830

23862

Forestry

54357

21559

6341

40338

Fi sheri es

22829

31772

Coal and lignite

32782

4228

25045

39486

Crude petroleum and natural gas

30837

27628

23816

20216

26165

8939

Metallic ores

21651

15567

20540

4514

Non-metallic minerals

14102

Rice and barley polishing and grain-flour mills 55809

16636

755

Starch, sugar, seasonings, etc.

116074

26157

2085

32663

Manufactured tobacco and beverages

33969

15115

767

19457

Miscellaneous processed foods

38199

40303

95402

2984

Natural fibre yarns

26100

28528

16786

1944

Chemical fibre yarns

52525

51397

5743

50083

Fabrics

34169

55940

5023

40814

Miscellaneous textile products

71816

32592

4105

46784

Saw-mills and plywood

18568

15909

2841

34709

Furniture and wood products

37096

39130

3036

49755

Pulp

32338

27412

35650

3631

Paper and paper products

46449

45912

2881

36683

Printing and publishing

52511

63314

87273

2326

Coal products

27008 147083

27438

3056

Petroleum products

11974

17553

10508

7081

Basic chemicals

40572

96450

4175

35066

Chemical fertilizers

39844

45497

67430

2948

Intermediate chemicals

83199

48159

56255

5579

Drugs, soap and cosmetics

82932

44149

5963

128804

Rubber products

39029

27059

3449

37856

Leather and leather products

39011

17434

26308

2685

Non-metallic mineral products

66153

66697

4087

36925

Pig iron, ferro-alloys, crude steel

24252

57757

16368

2506

Steel casting and forging

41869

46669

3209

26740

Rolled steel

29437

3383

23905

56458

Non-ferrous metal ingots

26865

38975

15111

5811

Primary non-ferrous metal products

30039

37476

4037

21291

Metal products

44686

42068

2468

26247

Machinery and instruments

56789

37272

6127

34695

Electric machinery and equipment

74690

38973

34070

2560

Transport equipment

76278

41917

2686

29493

Repair and maintenance of machinery, etc.

70881

46947

3204

25575

Miscellaneous manufactures

73958

37369

3834

47743

Electricity

23340

51460

6996

29435

City gas and water services

38028

40696

54657

2783

Business consumption expenditure

65213 236774

453851

816

Building construction

69495

59666

3624

33835

Miscellaneous construction

53675

68526

3734

37094

Office supplies

145474

56522

3146

57429

Scraps

8902

12466

612

4975

Undistributed

60336

36822

15166

68993

the matrix B1 for convenience.

90

TABLE 4

COEFFICIENTS OF INTERNAL PROPAGATION IN GOODS-PRODUCING

SECTOR INDUCED BY INPUT IN SERVICE SECTOR

Sector

Rice, wheat and barley

Miscellaneous crops

Livestock

Forestry

Fisheries

Coal and lignite

Crude petroleum and natural gas

Metallic ores

Non-metallic minerals

Rice and barley poiishing and grain-flour mills

Starch, sugar, seasonings, etc.

Manufactured tobacco and beverages

Miscellaneous processed foods

Natural fibre yarns

Chemical fibre yarns

Fabrics

Miscellaneous textile products

Saw-mills and plywood

Furniture and wood products

Pulp

Paper and paper products

Printing and publishing

Coal products

Petroleum products

Basic chemicals

Chemical fertilizers

Intermediate chemicals

Drugs, soap and cosmetics

Rubber products

Leather and leather products

Non-metallic mineral products

Pig iron, ferro-alloys, crude steel

Steel casting and forging

Roll ed steel

Non-ferrous metal ingots

Primary non-ferrous metal products

Metal products

Machinery and instruments

Electric machinery and equipment

Transport equipment

Repair and maintenance of machinery, etc.

Miscellaneous manufactures

El ectri ci ty

City gas and water services

Business consumption expenditure

Building construction

Miscellaneous construction

Office supplies

Scraps

Undistributed

TrCll5portation and

Trade Communication

3089

2242

3990

4058

1169

1079

11461

15325

2103

1156

3005

29780

73

1616

430

1642

692

2136

2725

1959

3396

3126

7770

1782

7226

8824

3240

4244

1420

1770

4038

4231

3241

4515

11377

17033

7463

3619

7519

3273

27389

11564

29721

10536

1142

13318

1739

46832

1608

2455

579

578

5821

7316

4200

1521

1497

8185

492

445

2238

7239

3897

15750

1117

4956

4982

20187

1038

3919

1621

7347

3532

7256

1924

7657

1800

4128

539

15919

12526

51220

5627

1773

6751

15826

1427

2142

81569

18212

0

0

0

0

37665

4861

3396

7789

45826

82680

Banki ng,

Real Insurance

estate and

Services

29239

347

19022

4637

14622

571

10104

12491

417

18837

8463

3805

152

60

2057

938

1191

2169

28287

582

13335

754

39452

708

51582

2185

1263

4274

1610

374

4434

912

4332

465

15608

5156

1387

2959

4573

749

16491

2640

28052

2566

2857

4028

1743

3608

1079

4008

3375

465

4482

18662

462

21077

2142

4592

215

1204

16036

5135

19479

7558

2441

12340

22222

9382

4924

2325

2412

8507

17153

6619

15969

5234

11355

1660

4408

9116

168849

13629

1358

5097

3510

14921

544

6594

41333

7124

0

0

0

0

1496

8926

9057

6812

16110

42035

91

TABLE 5

INTERNAL AND EXTERNAL MULTIPLIERS IN SERVICE SECTOR

(1)

Trade

= {I

- 8)-1

Transportation

and

Communication

Real

estate

Banking,

Insurance

and Services

1.006382

14208

1618

40780

49969

1.020766

1205

30004

Real estate

20839

4942

1 .000402

12839

61886

54474

31979

1.042842

(2)

Trade

Trade (wholesale and retail)

Transportation

and

Communication

Real

estate

Banking,

Insurance

and Services

1.018500

14691

13090

21801

28305

1.015694

10241

21579

2004

2449

1 .000991

2099

49081

20060

8373

1.034038

Real estate

Banking, insurance and services

in nature.

2)

and use our input-output system to study the cost-push effects of service-prices on

the prices of the P sector's products.

Obviously, the prices of the P sector's products are given by the following

equations:

P

= P 'p

+ 8 'p

1 s

(5.12)

where pp ,p8 are vectors of prices of the P sector's products and the S sector's

92

p

output, and tne coefficient matrices p' and Sl' are transposes of the matrices p and

Sl in the quantity model.

This price formation equation system (5.12) is a part of the following larger

model:

1

p

= p' pP

+ Sl 'p + v

8

P

= P l 'pP + s' p8

(5.13)

+v .

S

8

p

P

S

variables. The variations of p are due to cost-push effects, and, if we wish, the

p

8

this latter relation. Of course, the selection of endogenous and exogenous variables

is dependant upon the nature of the problem which we set forth.

The vector of determined prices in the goods-producing sector is represented by

the equation:

p

p

(I - p'rl{Sl'p

=B'{S'p

+ v }

+v}

p'

(5.14)

where B' is the transpose of the internal matrix multiplier of the P sector in the

quantity model.

If service-prices rise from p 8 to p8 + dp S , the resultant price-increases in the

P sector wi 11 be

dp

P

= B' S1

'dp = (s B)' dp = B 'dP .

81818

(5.15 )

Thus, in order to determine the cost-push effects of a rise in the levels of service

prices we need to transpose the sub-matrix multiplier Bl of the quantity system.

Returning to Table 3 and examining it from the perspective of cost-push effects,

we discover that:

in the prices of the Trade industry and of the Transportation and communication

industry than by a rise in the prices of the other service sectors, and (b)

the

93

such as Starch, sugar, seasonings and

~1iscellaneous

increases in Trade service-cost, and in Coal products and Basic chemicals in the case

of a rise in Transportation and communication cost.

Some caution is required in the evaluation of Table 3 from the perspective of

cost-push effects.

realistic ones, because the constant input coefficients are predicated on the absence

of variation in relative prices.

substitution effects which tend to set limits on price rises of the cost-push type.

On the other hand, the recent rising trend in the service-input coefficients of

Japanese industries leads to an underestimate of the actual coefficient values of

Bl"

IV.

Int~~ona Comp~on

of several countries.

include:

(1)

Input-output data

by the U.S. Department of Commerce, and (3)

1959, Dutch 1959 and Belgian 1959 tables by the Statistical Office of European

Economic Community.

Table 6 summarizes the nature of the interaction between the P and the S sectors

of each country in terms of the relation between the cross-input-coefficients of the

two sectors (i.e. Pl and 81 ) and the internal propagation of the goods-producing

sector (i.e. B).

this table are the row-sums of the coefficients of service-input generated by the

internal propagation of goods-producing sectors, i.e. the sum of the values of

Bl

94

TABLE 6

INTERNAL MULTIPLIERS IN THE GOODS-PRODUCING SECTOR AND

LEVEL OF SERVICE ACTIVITIES

(1)

in the Goods-Producing Sector

Country

Category

Germany France

States

Trade

Banking and Insurance

Real Estate

Transportation

Communication

Public Services

Other Services

D.0778

0.0130

0.0242

0.0490

0.0053

0.0135

0.0549

0.0235 0.0159 0.0197 0.0333

0.0005 0.0000 0.0000 0.0000

0.0480} 0.0474 0.0297 0.0340

0.0100

0.0054 0.0068

0.0008 0.0078 0.0011 0.0000

0.0159 0.0084 0.0356 0.0125

0.0496

0.0176

0.0000

0.0116

0.0072

0.0029

0.0324

Belgium

0.0456

0.0158

0.0000

0.0354

0.0081

0.0000

0.0185

for each service sector (i.e., figures are the ~ow ~um values of the eleme~ts of

Bl ), and indicate the coefficients of service-input generated by the internal

ptopagation of goods-producing sector.

** The names of the sector listed here are industries ~ec~v~ng the induce

effect.

(2)

Induced by Goods-Input in Service Sector

Category

Country

Germany

States

France

Belgium

Trade

Banking and Insurance

Real Estate

Transportation

Communication

Public Services

Other Services

0.1526

0.0721

0.2719

0.2979

0.1242

0.1470

0.5461

0.2346} 0.2507

0.4507

0.1944 0.2320 0.3330 0.1501

0.2211

0.1937 0.1165 0.0846 0.0737

0.3269 0.2874 0.0000 0.2125

0.5873} 0.3375 0.4114 0.3979

0.3034

0.1206 0.1490

0.2841

0.1588

0.4244

0.6082

0.1868

0.2886

0.1150

0.1480

0.5108

0.0931

for each service sector (i.e., figures are the column ~um values of the el~mentslof

B?), and indicate the coefficients of internal propagation in the goods-producing

sector induced by goods-input in the service sector.

** The names of the sector listed here are industries giving the induced

effects.

95

Of the over-all

values in the last line of Table 6-(1), that of the United States is distinctly high.

It totals 0.24, while values for the other countries are in the range of about 0.11

0.17.

Among these other countries, Japan and West Germany have relatively higher

Thus, the capacity of the industrial sector to induce service activity is

values.

Now, looking at

the table by service category, we find that the Trade category has a relatively high

value in almost all of the countries cited above, but, at the same time, it may be

worth noting that the Other Services category of the United States also has a significantly high value.

United States, have a significant effect upon the Other Services category as well as

on Trade.

Table 6-(2) tells us what sort of service activity has more influence on the

internal propagation of goods-producing activities, because the numerical values are

the sums of the coefficients of internal propagation in the goods-producing sector

induced by goods-input in the service sector, i.e. the column-sum of the coefficients

of B2 = BP l for each service sector.

Looking at the table by category, the values for Transportation are highest in

every country except for the United States. Thus transportation appears to have the

greatest capacity to induce goods-producing activities.

the highest value is found in the Other Service category, and this fact, together

with the above conclusions, suggests that the United States is a country which has

the most advanced "Service Economy".

the relatively high value of the internal multiplier of the goods-producing sector

in Japan (on the average, the value for Japan amounts to 2.298, while that of the

United States is 1.843 and that of West Germany is 1.732).

Japan's over-all value in the previous Table 6-(1) was not the highest because of the

relatively low service-input coefficients in the goods-producing sector (81) in

Japan.

to 7.3%, while that of the United States is 12.9% and that of West Germany is 9.3%.

96

TABLE 7

INTERNAL AND EXTERNAL MULTIPLIERS IN SERVICE SECTOR

(1 ) Internal Multiplier of Service Sector

a)

Country

States

Germany France

Trade

1.1801

Real Estate

Transportation

Communication

1.0873 1.0521

Public Services

Other Services

Category

b)

1.0655

Trade

1.1374 1. 1081

1. 3981

Real Estate

Transportation

1. 1816

Communication

Public Services

1. 1315

Other services

1 .0276 1.0175

1.1408 1.1503 1.3309 1. 1817 1.3327 1. 1047

1.0088 1.0876 1.0156 1.0000 1.0419 1.0000

* Figures in a) are calculated as the column sum values of the elements of the

matrix T, and figures in b) as row sum values of the elements of the same matrix.

** Table a) lists the names of industry g~v~ng the induced effects, and b)

lists the names of industry ~eceiv~ng the induced effects.

97

(2)

a)

Country

United

West

States Japan Germany France

Trade

1.0268

1.0202

1.0250

1.0121

1.0138

1.0253

1 .0159

1.0134

1.0248

1.0124

1 .0092

1. 0062

1.0157

1. 0066

Real Estate

1.0519

1.0339

1. 0271

1.0000

1 .0189

1.0355

1 .0117

Transportation

1.0501

1.0568

1 .0350

1.0339

1.0309

1.0416

1. 0289

Communication

1.0234

1.0379

1.0000

1 .0103

1 .0125

1.0150

1.0059

Public Services

1.0275

1.0245

1.0000

1.0000

1.0000

1.0000

1.0000

Other Services

1.0943

1.0467

1.0270

1 .0181

1 .0195

1.0270

1.0092

Category

b)

Trade

1.0718

1 .0705

1.0535

1 .0130

1 .0161

1.0507

1.0222

1 .0211

1.0557

1 .0140

1.0128

1.0343

1.0198

1 .0125

Real Estate

1.0379

1 .0011

1.0000

1.0000

1.0000

1.0000

1.0000

Transportation

1.0510

1.0710

1.0433

1.0313

1. 0315

1.0246

1 .0266

Communication

1.0090

1.0237

1 .0000

1.0050

1.0074

1.0130

1.0069

Public Services

1. 0226

1 .0014

1.0079

1.0009

1.0000

1.0056

1.0000

1.0740

1 .0215

1.0078

1.0206

1.0125

1.0464

1.0100

* Figures in a) are calculated as the column sum values of the elements of the

matrix K, and figures in b) as row sum values of the elements of the same matrix.

** Table a) lists the names of industry giving the induced effects, and b)

lists the names of industry ~ecelving the induced effects.

98

Focusing on the service sector of each country, we find that the sUb-matrixmultipliers B1 and B2 operate on that sector in an indirect manner. Of course, the

final propagation effect on the service sector itself may be shown by the value of

M or by the separate values of T and K, namely, the internal and external multipliers

= KT).

given in Table 7. These values reflect the power (or the sensitivity) of dispersion

of the service sector both internally and externally.

Table 7-(1) conveys the effects of internal propagation on the service sector

starting from service-inputs in the service sector itself.

for each category in that Table 7-(1)-a), it is apparent that the service sector of

the United States has the greatest internal propagation effects. The values for

Japan are of about the same order as those for the European countries.

Such internal

service sector itself through the goods-producing activities that start with the

consumption of goods in the service sector.

For example, the United States' Trade category has an internal multiplier effect

of 1.2362 on the average, and it leads to external repercussions through goodsproducing activities to the extent of an approximate 7.18%-plus average. We see then

that the total effect on the Trade category is equal to approximately 1.2362 x 1.0718

= 1.3250 on the average. Such is the manner in which the internal propagation

patterns together with the external repercussion patterns determine the characteristics of intersectora1 propagation in the service sector.

Among the round-about external effects in Table 7-(2)-a), the Transportation

category has the highest values in all countries except the United States.

Again,

the United States alone has its highest value in the Other Service category. This

fact reinforces our earlier conclusion that the United States of America has the

most advanced Service Economy from the point-of-view of the interaction of

goods-producing activities and service activities.

A comment is needed regarding intercountry comparisons using input-output data.

As international standards for calculating input-output tables have not yet been

established, inconsistency in the arrangement of data, especially of the service

99

sector, may lead to some estimation errors, making only rough international

comparisons possible.

resign ourselves to evaluating column sum or row sum values instead of investigating

the detailed cross-effects that are manifested by the elements of the matrices

themselves.

PART THREE

DUAL ECONOMIC STRUCTURE

CHAPTER 6

THE DUAL STRUCTURE OF THE JAPANESE ECONOMY AND ITS GROWTH PATTERN *

1.

IntJtoducti.oYL

character commonly found in developing countries, not only in production and

distribution methods but also in the mode of life.

As far as the co-existence of pre-modern and modern methods of production is

concerned, Japan and underdeveloped countries in Asia have something in common.

In

Japan, however, pre-modern and modern branches are unified in a national economy,

whereas in Asia's underdeveloped countries they remain marked by the colonial

economy and the mono-culture economy.

as opposed to "dual structure," a concept which applies to Japan.

Unlike industrial development in Western Europe, where modernization delivered

a frontal attack on pre-modern techniques, in Asian countries modernization may keep

them alive for a long period. This particular tendency has been pointed out by

A. O. Hirschman; in contradiction to many other authors, he maintains that dualism

is "the reason for dualistic development,,,2) which has some compensating advantages

and which represents in a wayan attempt by an underdeveloped country to make the

best of its resources during a transitional phase.

exist between the modern and pre-modern branches, "pre-modern" industries will

probably have an oppotunity of prolonging their life and thus creating a valuable

Veveto~ng Eeono~e6,

1) A. O. Hirschman [21], p. 126.

2) Hirschman [21], pp. 125 ~ 132.

170,

101

period for transition to "modern" operation. On the other hand, existing pre-modern

enterprises run little danger of being eliminated, since new enterprises usually

emerge in an industrial group which is entirely different from the current native

industry. This "dualistic state" could certainly be retained and utilized, but, as

Hirschman conceded, pre-modern branches will sooner or later succumb to the modern

production methods.

above-mentioned adaptation in utilizing the dualistic state develop, but the process

of adaptation in organizing complementary relations within the framework of the whole

national economy developed as well.

Differentials in modern and pre-modern branches, which are found in Asian

underdeveloped countries, produce a polarization involving high income and low

income. Moreover, these two branches have a strong tendency to coexist in a

heterogeneous and unincorporative form.

without being mixed, like water and oil.

large modern

relation, the latter depending on the development of the former; on the other hand,

large enterprises use the cheap-labor products of medium and small enterprises and

regard them as a cushion against business fluctuations.

Economtc Gltow:th and Vi66Vle~ in Cap.dat IYLtelUl.dy by Size 06 FiJun

II.

1)

Schema

06

06

EYLteJtplU.6e-6

I

GC

= 8,3)

As is proved by many statistical analyses, the larger the scale of enterprise, the

higher the capital-output ratio (C), whereas the smaller the scale, the lower the

ratio.

Consequently, even in the case where medium and small enterprises would grow

102

at the same rate as large enterprises, the required capital accumulation ratio (s)

necessary for the realization of the growth rate (G) will be small because of the

low capital-output ratio, while on the other hand, the high capital-output ratio of

large enterprises makes the required capital accumulation ratio extremely large.

This means that large enterprises cannot meet the high required capital accumulation

ratio with retained earnings, even though they have a large amount of owned capital.

As a result, they must depend upon outside capital to a considerable extent.

Such a tendency is of special relevance in an economy where, as in Japan, the

ratio of owned capital to total capital is particularly low compared with the

international level. Moreover, the continued high rate of growth after the war has

strengthened this tendency. Large enterprises must now rely on outside funds to a

greater degree than medium and small enterprises.

the close connection between large enterprises and banks, and the consequent

concentration of bank loans and discounts in enterprises of larger scale. However,

there are some factors necessary for the realization of this motive.

It is a fact

that larger enterprises have a strong borrowing power as a result of their privileged

position in regard to capital accessibility. This capital accessibility depends,

after all, upon the power of owned capital in large enterprises. Generally speaking

the greater the owned capital, the better the credit rating, and large enterprises

enjoy a favourable position especially in regard to borrowing long-term funds.

Indeed, statistical data indicate that owned capital of large enterprises is greater

than medium and small enterprises not only in absolute amount, but also in the ratio

of owned-capital to working capital (the debit side in the balance sheet).

Even though large enterprises are thus able to actualize a high required

capital-accumulation ratio, the high capital-output ratio itself constitutes an

unfavourable condition.

relatively unfavourable, and also that the depreciation cost and interest charge are

high.

In order to explain high labor productivity in the simplest form, let us

equation of economic growth.

yo

= k, corresponding to Harrod's

103

worker,

capital intensity (that is, the amount of capital stock per worker).4)

In order to improve in large enterprises the relationship of the capital-output

ratio (0) and high labor productivity (y) which progresses at a greater rate than in

medium and small enterprises, production methods must be adopted so that capital

intensity (k) more than offsets the progress of (0), as indicated by the fundamental

equation of productivity.

In large

enterprises the adoption of high capital intensity means at the same time a high

accumulation of capital stock; it corresponds to capital concentration on the

financial side.

In sum, a high capital-output ratio in large enterprises has two aspects,

financial and material/technical, and these can be disposed in a schema of capital

concentration in larger enterprises (Figure 1).

Figure 1.

go

=s

Higher ratio of required

Concentration

- - funds

capita 1 accumul ati on

Fi nanci a1

... aspect

Two aspects

of capital

concentration

yo

=k

h

. tt

Concentration of

Material

Hig er capital ln enSl y - - assets in kind .. aspect

a log k - b

4) If

labor, and

capital, then yo = f~ = ~ = k

104

On the other hand, in regard to the technical aspect of production, the high

capital-output ratio means an increase in capital intensity needed for achieving

higher productivity, which leads to a concentration of capital stock. This double

concentration is made possible because large enterprises enjoy capital accessibility.

Mathematical formulas can be used, but first more elements of analysis are required.

2)

Looking at capital concentration from the technical aspect, what is the basic

support of the dual structure of the Japanese economy? Various economic, social,

institutional, and historical factors with different influences are at play.

If one

is omitted, the remaining factors are insufficient to give the full picture.

Although there is a real danger in going to extremes, let us concentrate on two

fundamental factors:

1.

unemployment, and 2.

other countries, and the explanation is mostly given from the viewpoint of the

special character of the labor market. On the supply side of labor, there exists

the pressure of excess supply, causing a search for employment at low wages. On the

demand side, medium and small enterprises plan production with low-wage labor,

whereas large enterprises are able to obtain better labor at wages relatively higher

than the difference in quality. On the labor market itself, labor immobility is

characteristic of large enterprises; they have a seniority wage system with automatic

increases according to service years, on the premise of life-long employment. There

is some turnover from large enterprises to medium and small enterprises, but the

reverse movement is out of the question. Under these circumstances, wages in medium

and small enterprises subjected to the pressure of excess supply of labor are low,

and their employees cannot receive the same wages as in large enterprises, even in

cases of long service. The result is a structure of wage differentials by size of

firm.

This view certainly grasps one of the key points of the problem.

However, it

105

has not taken into consideration the conditions of production which give large

enterprises the capacity to play higher wages, nor does it explain Japan's high rate

of economic growth and the permanence of the dual structure.

Differentials in

accumulation must be examined. 5)

Table 1 gives a summary of the main indicators; their relationship is corroborated in Figure 2.

The upper part of this figure indicates that by locating capital intensity

(tangible fixed assets per employee) by size of firm on the horizontal axis, and

labor productivity (value added per employee or turnover per employee) on the

vertical axis, correlating points (represented by white or black points on the

curves) can be plotted according to the size of firm.

In enterprises of the smallest size (employing less than 10 persons), value

added productivity is 180,000 and capital intensity 70,000, whilst in the largest

(employing 1,000 or more persons), value added productivity is 900,000 to 1,000,000

and capital intensity 600,000 to 700,000.

Between these

extremes, enterprises of the sizes 2,3,4, ... in order of capital intensity form a

convex curve of productivity moving from the lower left to the upper right.

As

productivity curve, and the Cobb-Douglas logarithmic formula js also satisfactorily

verified, but the curve fits the semi-logarithmic type better. The realization of

high productivity in large enterprises is assured by a greater increase in capital

intensity than an increase in the capital-output ratio with the enlargement of size

(as illustrated in the lower part of the figure).

Wage differentials are also found in Figure 2.

per employee on the vertical axis, the amount is 100,000 in the smallest class and

300,000 in the largest, the difference being 3 times.

wages are correlated with capital intensity in the direct form (black points on the

5) See Miyohei Shinohara, [45], pp. 103

109.

106

TABLE 1

PRODUCTIVITY, CAPITAL INTENSITY, CAPITAL-OUTPUT RATIO AND

WAGE RATE BY SIZE OF FIRM (1957)

Size by

Number of

Employees

Number

of

Firms

Productivity

Value

added O/L

(thousand

yen per

employee)

CapitalOutput

Capital

Turnover Intensi ty Ratio

Wage Rate

employee employee K/O

K/T

(thousand

yen per

employee)

T/L

K/L

fI/L

1-

300,374

186

541

69

0.371

1.128

114

10-

29

77 ,644

289

904

78

0.270 0.086

136

30-

49

13,332

348

1,140

91

0.261

0.080

145

50-

99

8,460

420

1,392

120

0.285 0.086

157

100- 199

3,146

492

1 ,548

166

0.337 0.107

172

200- 299

981

564

1,716

209

0.371

0.122

187

300- 499

645

696

2,088

309

0.445 0.148

205

500- 999

441

780

2,328

408

0.523 0.175

230

9 1,000-1,999

222

922

2,886

589

0.639 0.204

259

10 2,000-4,999

135

1,078

2,872

687

0.669 0.245

301

5,000-9,999

46

866

2,393

558

0.729 0.233

287

28

897

2,643

651

0.727 0.245

329

405,424

516

1,560

289

0.560 0.185

194

11

12 10,000 or more

Total

Source:

Th~

dgta

ar~ tgk~n

EnteJtpWe.6), 1957.

Note : Manufacturing industry only.

unincorporated firms.

107

Figure 2.

I-.:j

PRODUCTIVITY BY SIZE OF FIRM

320

160

C)

>

:;:;

u

-6o

T

L

140

= 2,038.0 log LK

(R = 0.983)

.9

- 2,982

.11

120

100

.=

,..

Q)

'"

SO

,of

:>

Q)

c::

~

'"

3:

--I

20

1

1

lY

,..'"

11

1"12- -

~.---.

_.---

'-~

"S

"S

li

c

n

.12

5 _--.6

a4 ..

'"o

~

""\J

160

,.."C1's

200

__ ,g..-012

40

"S

010

___

~6/---- Q

.. 746 8 log ! - 1,150

L

.

L

2 4 j6 5

(R = 0.987)

3

-:;:

240

'c..

-0

.10 2S0

<T

.....

<

120 .....

~

SO

~

t:-<

J~~----~O

9

40

C>

0r---'1~0---o2~0---o3~0---'4~0~-'5~0~-'6~0~~7rnO~0

~2 ~405 6

Capital Intensity K/L

E-i

10

--2

07

08

........

----__

09

010

:>< 0.2

.3

'-tTi2

2-4

.....o

-(ri1

-+->

'" 0.4

c::

-+->

'"

Co

-+->

.5,

0.6

'"

-+->

'g.

Source:

Note

O.S

Economic Research Institute, Economic Planning Agency. See K. Miyazawa

and others, "Capital Structure by Fi rm-Si ze," Ec.onomtc. Bu,Ue:Un (i n

English), No.6" edited by the Economic Research Institute, Economic

Planning Agency, Tokyo, 1961. For original data, see Table 1.

The numbers represent the size of the firm based on the number of

employees: the size increases as one goes up from 1 to 12.

108

straight dotted line), a clear linear correlation appears.

capital intensity are a cause of differentials in productivity.

As shown by the

linear correlation formula indicated in the figure, in marginal terms, when the

differential in capital intensity increases by 100,000 as a result of an increase in

scale, wage differentials increase by 28,000 and more.

production methods, which in turn make possible high productivity and high-wage

capacity.

On the other hand, medium and small enterprises are forced to adopt labor-

intensive methods with a low technical level (or low capital intensity), due to

their weakness in regard to capital accessibility;

low wages, due to the pressure of an excess labor force and potential unemployment.

3)

PeJUnaJ1enc.e 06

Figure 3, where differentials in the sphere of production are indicated by the

distance between two dotted curves, namely, the production function in large enterprises (fa) and the production function in small enterprises (fb ).

For simplicity's

points

Wage rates of large and small enterprises are given on the vertical axis by

a

In this case, the production point of maximum profit rate in large enterprises

(obtained by drawing a tangent line from a to the production function f a ) is

in small enterprises

the actual line);

a.

a,

and

(curve of

of large and small enterprises (the slope of the tangent line) is supposed to be

equal; but even if differentials in profit rate are supposed, there is no change in

the situation.

If we suppose that, for some reason or another, wage differentials are narrow-

109

Figure 3.

...,

.~

::l

"0

c..

b'

b

O~---------------------------

Capital Intensity

point of small enterprises shifts from S to S', resulting in a decline in the profit rate (the slope of the tangent line).

under the new wage rate, to obtain the same rate of profits as in the past, there

is no other alternative but to adopt high-grade production techniques fi' and raise

the production point to B".

fi coincides with fa as all enterprises achieve an almost identical level of production, this level would coincide with the production function of the original

J. Robinson type. 6) The reason why J. Robinson succeeded in producing a productivity curve for the economy as a whole is due to the fact that she tacitly presupposed

a homogeneous economy where various differentials are almost negligible.

The actual

6) J. Robinson [42J, pp. 81-106.

110

The first fundamental condition to be considered is the existence of differentials in capital accessibility.

cessibility, small enterprises relying on their own strength cannot raise their

capital intensity to a point corresponding to

~"

Under such circumstances, and though many more complex factors will be at work, in

substance there are four possibilities:

profit rate at point

point

~',

(2) remain at

or thereabout by hiring new cheap labor, and failing to narrow the wage dif-

ferentials;

(3) when the above two cases are impossible, small enterprises may

large enterprises, and adopting new techniques

~"

small enterprises, possibility (3), is of common occurrence; their survival at the

cost of a low profit rate, possibility (1), can also be expected in many cases.

But

in view of the pressure of excess supply of labor, as obtained for a long period

after the war, the survival of small enterprises at a low production point, possibility (2), can be said to have been the most probable case.

ever, points toward possibility (4).

small enterprises, by giving them assistance in raising funds, providing technical

guidance, lending idle machinery, etc. This results in an improvement in the dual

structure.

are introduced into the large enterprises themselves which provoke the development

of the subcontracting system. The result is that, according to Figure 3, the shift

to the upper right of the production function in large enterprises f a precedes the

shift to the upper right of fb caused by the modernization of medium and small

enterprises.

third, and more subcontractors.

111

improved as a whole, as long as unequal distribution of capital accessibility and

pressure of excess supply of labor remain.

population increase and the increasing trend of demand for labor due to capital

formation are favourable factors, and worthy of attention.

III.

1)

In Figure 3, capital accessibility related to the owned capital of the enterprise is presented as one of the shift parameters of the productivity curve fa' fb

Bas~d

long-term debt X2 (the amount per person based on the number of workers by size of

firm) is obtained, and amounts to X2

= 0.0667Xll.303.

debt to owned capital is 1.30. Elasticity greater than 1.00 means that, in accordance with the expansion of owned capital following the enlargement of size, longterm debts register a greater increase than owned capital.

owned capital rises by one per cent following enlargement of size, long-term debts

increase by 1.3 per cent.

owned capital indicates its degree of capital accessibility,7) and that the competitive position of a firm in the capital market is limited by the amount of owned

capital.

Since the size of owned capital is the fundamental factor for capital accessibility, the larger the amount of owned capital, the more capital-intensive methods

of production are adopted due to the realization of high productivity and inclination towards high capital accumulation.

7) This kind of view is also maintained by M. Kalecki [25], pp. 91-95, and

J. Steindl [49], pp. 40 ff.

112

TABLE 2

DIFFERENTIALS OF CAPITAL INTENSITY, OWNED CAPITAL AND

LONG-TERM BORROWINGS BY SIZE OF FIRM

Size of Firm

Long-term Capital

(total assets) per Employee

( million)

Xl + X2

Owned Capi ta 1

per Employee

Xl

Long-term

Borrowing

per Employee

X2

Capi ta 1 I nten si ty

(tangible fixed

assets per

employee)

0-

70.2

65.6

4.6

58.7

2-

68.3

60.2

8.1

60.2

5-

10

95.7

83.9

11.8

102.0

10-

30

167.7

143.2

24.5

142.6

30-

50

186.0

121.0

65.0

182.2

50-

100

226.9

188.8

38.1

186.0

100-

500

459.7

375,8

85.2

334.8

500- 1,000

640.7

425.8

214.9

533.0

1,000- 5,000

1,014.8

685.7

329.1

739.9

5,000-10,000

1,589.2

1 ,186.6

402.6

1,018.6

1,316.7

1,015.3

301.4

988.9

708.0

529.9

178.1

525.3

10,000Average

Source:

Note

(YeaJtbOOR 06 CoJtpoJtate EnteJtpWe S-ta.U6:Uc.6), 1957. Manufacturi ng

industry only. Unincorporated firms are not included.

Long-term capital = Owned capital + Long-term borrowings.

Owned capital = Capital + Capital surplus + Earned surplus

(including net profit and loss for the current term).

Long-term borrowings = Corporate debenture + Long-term borrowings

from financial institutions.

113

methods of production would be profitable even to large enterprises, or at least differentials would not be as large as actually experienced.

intensity in large enterprises is high.

Nevertheless, capital

For instance, Japanese enterprises manifest a strenuous drive to attain the advanced technical levels of developed countries.

cause is the fact that the price of capital (interest rate) is relatively cheap for

large enterprises.

enterprises are not easily available.

tion of 5 million and less bore an average interest rate of 17 per cent, whilst

large enterprises with a capitalization of 100 million and over used borrowed funds

bearing the relatively low average interest rate of 11 per cent as shown in Table 3.

TABLE 3

AVERAGE LEVEL OF INTEREST RATES ON BORROWINGS BY SIZE OF FIRM

Size classified by paid-in capital -(unit:

Years

per cent)

-2

million

2-5

million

5-10

million

10-50

mill ion

50-100

mill ion

100

mill ion

1956

15.36

14.52

14.28

14.19

13.35

12.24

1957

12.79

15.11

14.40

14.79

12.59

10.23

1958

17.38

17 .80

16.49

13.84

13.62

11.15

Source:

Note:

outstanding amount of borrowed funds at the end of the year (longand short-term borrowings plus corporate debentures).

The average interest rate in the manufacturing industry = the sum

of interest payment discount + (shoft-term borrowings from financial institutions + long-term borrowings + corporate debentures).

114

to the solid line curve I in the centre. The imputed cost of funds is measured on

the vertical axis. On the horizontal axis, total funds employed are measured, and

are considered to have been put in the order of advantageous sources of investment

funds, namely (a)

Figure 4.

VI

<+-"g

o :::s

of.>LI...

VI

"0

Q)

of.>

:::s

0-

....S

1.

Since internal funds may be used freely by the enterprise, their investment

internal investment of these funds means the sacrifice of such external earnings, a

so-called opportunity cost.

OA, the accumulation would be made with nearly perfect elasticity to its opportunity

cost.

2.

raised through borrowings from financial institutions and the issue of debentures

is accompanied by a cash cost in terms of .interest payments, as well as imputed

costs. This brings about the rise in cost per unit of funds raised up to the point

B.

Real interest rates (cash cost plus imputed cost) rise with the increase in the

3. The raising of funds through the issue of stock costs more than other

115

sources of funds, because of the expenses for issuing, the care taken to protect the

market prices of the existing stock, the disadvantages as to taxation, etc.

However,

as long as enterprises accept this high cost, the raising of funds through the issue

of equities would not be so inelastic as in the case of borrowed funds; it may even

be considered as quite elastic. The shape of the curve I on the right side of point

B represents this fact.

This is the graph of the cost schedule for investment funds as shown by J.

Dusenberry.8)

because the cost schedule for investment funds shows a great difference according to

sizes of enterprise.

Going back to Figure 4, in medium and small enterprises, owned capital is small

in absolute figures; therefore, as indicated by the broken line lIon the left side,

the gradual increase begins early.

of borrowing, and will steepen the slope of the upward curve.

of funds through the issue of stock and debentures runs into prohibitive

difficulties, due to peculiarities of the Japanese capital market.

Consequently,

the cost schedule for investment funds II ends by being entirely inelastic.

The cost schedule for investment funds of large enterprises is represented by

the broken-line curve IlIon the right side of Figure 4. The amount of internal

funds and the slope of the upward curve are not independent of one another.

It may

be said that the larger the internal funds, the slower the slope of the upward

curve, because, owing to the capital power of large enterprises, borrowed funds can

be raised at lower cost.

upward part is actually more elastic than is illustrated, being nearly horizontal.

Further, under the existing circumstances, the cost of expanding net worth through

the issue of stocks being fairly high for large enterprises, it is plausible that

the right-hand part of the curve III, rather than being continuous as in the Figure,

8) J. Dusenberry, [12], pp. 93-99.

116

At any rate, it

is clear from Figure 4 that the difference between large and small enterprises in

the cost schedule for investment funds causes a marked disparity in the average cost

of raising funds per unit of total capital employed.

rates are paid by small enterprises, and relatively lower rated by large enterprises.

In Japan, an almost institutionalized relationship exists between the different

sizes of enterprise and various types of financial institutions in accordance with

the capital accessibility of the enterprise.

This Figure may be called the x-type intersection of borrowed funds of enterprises by size of firm.

horizontal axis, and ratios of borrowed funds by lenders to total borrowed funds on

the vertical axis. The ratio a (city banks) can be considered as an indicator of

the borrowing power of enterprises in each size group:

it increases regularly as

the size of the enterprise becomes larger; it declines a little at the point of the

largest size, but if borrowed funds from long-term credit banks and trust banks are

added (a'), it shows a smooth upward line.

Ratio b (funds borrowed from customers) can be considered as an indicator

reflecting in part the subcontracting relationship. The curve is high in the case

of medium firms as a reflection of the tendency of medium and small enterprises to

come under the control of large ones.

relatives, and acquaintances) and ratio d (funds borrowed from various medium and

small financial institutions) shows a smooth downward line. The weak borrowing

power of medium and small enterprises is manifested by their high degree of dependence on these small financial institutions. The x-type intersection of lines a and

d

is a clear reflection of the dual structure viewed from the financial angle.

In

other words, small enterprises survive by depending for a considerable part of their

funds on money-lenders, customers, relatives and acquaintances, who can be termed

"marginal suppliers of funds." On the other hand, large enterprises subsist in

dependence on the role of the Bank of Japan as a "marginal supplier of funds,"

namely by its advances through the intermediary of city banks to the extent

corresponding to the firms' liquidity position.

117

Figure 5.

%

100

a'

a

50

b ............

00

"''---...

--..... __ .. __

',-

_-

.:==.:.-----....-- --.

--_.... ...

10

11 12

Size of Firm

Source:

Notes:

Same as Figure 2.

1. The size of enterprises on the horizontal axis is measured by the

number of employees, increasing from 1 (l-lO employees) to 12

(lO,OOO and more employees).

.

2. This chart shows the ratio of loans from each lending institution

to total loans:

a - city banks

a'- city banks plus long-term credit banks and trust banks

b - customers

a - b plus money-lenders, relatives, and acquaintances

d - a plus financial institutions for medium and small enterprises.

3)

the borrowing side, must now be investigated from the lending side.

Table 4 indicates the average rates of interest by type of financial institutions. The average interest rate of financial institutions for medium and small

enterprises (mutual loans &savings banks, credit associations) are considerably

higher then those of city banks and local banks for loans (loans on deeds, loans on

bills) and discounts (discount of bills): differentials spread from 7.98 per cent

118

p.a. for city banks to 12.47 per cent p.a. for credit associations. These are

averages, of course; rates vary also according to borrowers.

Large enterprises are able to select the lender banks, which is then forced to

put up with interest rates at nearly "competitive prices," whilst for medium and

small enterprises lenders are in a monopolistic position, selecting borrowers and

charging interest at "monopolistic prices."

"equilibrium interest rate" which equates with supply and demand of total funds of

all financial institutions, banks as a whole would extend loans to large enterprises

at lower interest rates than the equilibrium rate, and make up the deficits thus

incurred by higher rates on loans to medium and small enterprises.

However, as

regards loans to medium and small enterprises, there is an economic law that the

cost to an individual financial institution of making a loan is higher when the risk

is greater and the amount smaller.

TABLE 4

DIFFERENTIALS IN AVERAGE RATES OF INTEREST BY TYPE OF LENDING INSTITUTIONS (1957)

City banks

Local banks

Long-term credit banks

Trust banks

Mutual loans &savings banks

Credit associations

Loans

%p.a.

Discounts

%p.a.

7.98

8.54

9.41

8.03

10.75

12.47

8.42

9.10

7.87

8.11

10.40

12.47

1957.

St~tiC6

06 Japan),

loans and the average rate of discount. The textbook argument would be that loans

are longer credit than discounts; therefore rates are to be higher in the former

than in the latter.

than the average rate of interest on loans in the case of city banks, local banks,

and trust banks.

119

follows.

these loans are extended at relatively low interest rates, whilst as to discounts,

the weight of medium and small enterprises is high, and these discounts are made at

relatively high interest rates.

general average. Thus, large banks are able to extend loans to large enterprises at

relatively low interest rates, because of the high interest rates on loans to medium

and small enterprises.

offering only short-term loans to medium and small enterprises. On the other hand,

the average rate of interest in long-term credit banks, mutual loans and savings

banks, and credit associations is higher for loans than for discounts, as textbooks

usually maintain. The reason is that customers of these financial institutions are

limited mainly to either larger enterprises (in case of long-term credit banks) and

medium and small enterprises (in case of mutual loans and savings banks and credit

associations).

Thus, loans of long-term credit banks and others to large enterprises form one

pole, and loans of small financial institutions to medium and small enterprises

another; in the middle, discriminative loans of city banks and local banks to large

and small enterprises produce the above-mentioned reverse phenomenon. This

situation can be ascertained by the difference in the distribution pattern of loans

by various types of financial institutions.

Figure 6 shows the distribution of loans to different sizes of enterprise by

various types of financial institutions, based on data used for Figure 5. The curve

indicated "average" is a cumulative frequency curve for total loans of all financial

institutions, including small financial institutions such as money-lenders and

government financial institutions, which are not listed in the Figure. The uneven

downward development indicates that the distribution of funds as a whole is

unequ~l.

Since in the survey method loans of long-term credit banks and trust banks

cannot be separated, it is regretted that Figure 6 is inconsistent with the data of

Table 4.

However, it appears that the curves of city banks and of local banks are

located between the most uneven curve of long-term credit banks and trust banks

inclining towards large enterprises and the curve of financial institutions for

120

Figure 6.

Financial Institutions for

Small and Medium Enterprises

100r----------------------------+--------~

50

/~

'----1-- Average

----+-- City Banks

----+_

0~~~~==~

4

5 6

7 8

9 10 11 12

Long-term Credit

&Trust Banks

Size of Firm

Source: Same as Figure 2.

Note

The vertical axis indicates the cumulative frequency curve, and the

horizontal axis the size of enterprises by the number of employees.

medium and small enterprises (mutual loans & saving banks, credit associations,

credit co-operatives, etc.).

distribution.

and interest rate have been observed on the ground of unequal distribution of

capital accessibility.

The decision concerning the degree of combination of the two factors of

production, capital and labor (capital intensity) depends on their relative price

121

which an individual enterprise faces in the factor markets.

In Figure 3, a

intensity is a function of factor prices.

cope with relatively high interest rates and relatively low wages.

On the other

rate of capital intensity to cope with relatively low interest rates and ,high wages.

This situation can be analyzed by the method of "iso-quant curve of production."

Let us suppose that the production of enterprises of different sizes is

enlarged to the production level of the largest enterprises (with assets of over

10 billion), and the same magnification applies to capital (tangible fixed assets)

and labor (the number of employees) without change in the initial ratio of factor

combination.

Figure 7.

III

....,

OJ

OJ

~

.J:l

.~

0>

'"

III

'"

III

-c

OJ

<: X

.~

...., 4-

.~

0.

'"

Source:

Note

(Ye.aJ1.bOOR 06 Coltpolta;te EnteJtpwe Sta.-U6tico), 1957. Covering

manufacturing industry only.

Enterprises are classified by asset holdings:

1. less than 2 million

7. 100-500 million

2. 2-5 million

8. 500-1 ,000 million

3. 5-10 million

9. l ,000-5,000 mill ion

4. 10-30 million

10. 5,000-10,000 million

5. 30-50 mi 11 i on

11. over 10,000 million

6. 50-100 million

122

Starting from the most labor-intensive combination 1 (enterprise with less than

2 million assets), various combinations 2, 3, 4 ... are determined up to the

highest capital-intensive combination 11.

acting under the principle of minimum expenses with a production curve identical to

the observed iso-quant curve, the ratio at the tangent line to the various production points on the curve should indicate relative prices of capital and labor. The

textbook argument would be that the greater the slope of the tangent line, the

smaller the capital expenses (interest rates), and the more advantageous it is to

replace labor by capital, and vice versa.

Figure 7 is, to the end, an

ob~e4ved

~chedute

tangent line ought to apply to the individual schedules, but not to the observed

Consequently, it is meaningless to measure the ratio of relative prices of

labor and capital by size of firm from this observed curve. g) The conclusion is the

curve.

following:

schedules, and the contact points of these respective iso-quant curves and the price

lines of each size of enterprise generate the observed iso-quant curve shown in

Figure 7. This interpretation is identical to that of the observed productivity

curve illustrated in Figure 2.

Since measurement of the schedule iso-quant curves is difficult, the structure

of the ratio of labor and capital prices by size of firm must be obtained by other

means. Table 5 shows that the differentials in the average rate of interest on

borrowed funds (see Table 3) can be converted into an index number taking the

interest rate of the smallest enterprises as 100. The same can be done for the

differentials in wages. 10 ) The ratio of both indices is given as the difference in

g) Such measurement has been tried: the Douglas type production function was

measured from the basic data of Figure 7, and the condition of minimum expenses

added. Then the values of differentials in interest rates were arrived at by

substituting the values of differentials in wages obtained from data using the

minimization equation. However, the values thus obtained could not be judged

significant compared with the actual ones.

10) The differentials in wages are obrained from the Corporate Enterprise Statistics

cited in Table 3.

123

relative prices.

TABLE 5

DISPARITY OF RELATIVE PRICES OF WAGES AND INTEREST RATES BY SIZE OF FIRM

Size of Finn

(paid-in capital)

Differentials in

Wages

( mill ion)

(l,OOO)

(1)

- 2

2- 5

5- 10

10- 50

50-100

100-

139

172

173

200

231

348

100.0

123.5

124.5

143.5

165.9

249.9

Notes : (1) Index number

(2) Index number

the total of

institutions

(3)

(2)

(1)

Differentials in the

Average Rate of

Interest

(%)

(2)

17.4

17.8

16.5

13.8

13.6

10.2

Differentials in the

Ratio of Wages and

Interest Rate

(3 )

100.0

102.3

94.8

79.3

78.2

64.4

1.000

0.828

0.761

0.553

0.471

0.258

of the discount rate of interest expenses divided by

long-term and short-term borrowings from financial

plus debentures.

interest rates to wages is 0.258 for the largest enterprises with a paid-in capital

of over 100 million, whereas it is 1 for the smallest enterprises with a capital of

less than 2 million.

with Figure 7, it may be supposed that the price line of the ratio of interest rates

and wages (as the reciprocal) grows steeper from small to large enterprises.

Different in this from wage differentials, differentials in interest rates are

also common in other advanced countries, because of the risk connected with the

borrower.

A fairly

evident type of combination is found between the different sizes of enterprise and

various types of financial institutions.

namely that a firm depends on outside capital rather than on owned capital as in

other advanced countries. Consequently, differentials in interest rates influence

124

considerably and directly the formation of the dual structure.

disparity in relative prices of interest rates and wages (see Table 5) is fairly

large, and it may be concluded that it contributes to the further widening of

differentials in capital intensity.

The analysis of factor ratios in terms of relative prices is a static endeavor.

There are also dynamic factors causing differentials in prices and in capital

intensity.

2)

Returning again to general points of view, one aspect has remained untouched in

the above analysis.

Pressure of excess supply of labor and unequal distribution of capital

accessibility have already been pointed out as the two fundamental supports of

Japan's dual structure; they cannot be separated.

tion in Japan presents three peculiarities:

capital concentration in a

capital - short economy, the stimul us of the i nternati ona 1 envi ronment, and the

co-existence of large and petty capital.

1.

Existing capital is

As often

pointed out, shortage of capital has been one of the fundamental factors restricting

the development of the Japanese economy.

Funds scattered in the private individual sector are collected through banks, postal

savings and other financial institutions, which act as intermediaries between

individuals and enterprises.

the Japanese money and credit situation, finds its fundamental cause in the shortage

of capital. Thus, the rationale for financial institutions is established, and an

institutional background is provided for differentials in interest rates related to

credit-standing of the borrower.

125

2.

If low wages are due to the pressure of excess supply of labor, the

large enterprises. This is a widely accepted economic principle.

Nonetheless,

differentials in interest rates to the advantage of large enterprises exist, and are

a reason for them to adopt high capital intensity. This fact alone does not explain,

however, the existing marked differentials in capital intensity. Also important is

a strong expansion mood and an active inclination towards investments, which tend to

make up for the shortage of capital and which are stimulated by the international

environment in which the Japanese economy has to catch up rapidly with the technical

level of developed countries. This peculiarity is supported in turn by the combination of large banks and large holdings of capital through loans to related

enterprises; differentials in interest rate advantageous to large enterprises can be

considered as cause or effect.

in capital intensity between large and small enterprises. Moreover, large enterprises, in case of emergency, can depend heavily on the Bank of Japan as a

"marginal supplier of funds" through large banks.

3.

cases.

ing,excess labor.

through the subcontracting system and the formation of related enterprises under

their control, and use medium and small enterprises as a cushion against business

fluctuations.

suppliers of funds" can offer medium and small enterprises. The higher interest

rate, due to the greater risk, is a disadvantage compensated by cheap labor. A

last factor would be the high weight of "trade credit" in the composition of the

total funds of medium and small enterprises, which have such recourse to bills and

126

accounts payab1e. 11 )

V.

Conc1.!L6..(.on

In Japan, differentials in wages and interest rates, manifested by the utili'zation of relatively cheap labor in medium and small enterprises, and relatively low

interest rates for large enterprises have solidified the dual structure of the

Japanese economy. An anticipated slowing-down of the growth in the labor supply,

the i ncreas i ng trE!nd of demand for 1abor due to capi ta 1 formati on, and the promotion

of foreign trade liberalization are putting pressure on the pre-modern sectors.

These facts have started a trend towards the abolition of the dual structure.

It

appears imminent that systematization and reorganization of medium and small enterprises will be pushed.

capital.

In Asia's underdeveloped countries, differentials in income and wages appear as

an extreme difference between the upper and lower classes, somewhat as the division

between two poles.

stratum to a middle stratum and from a middle stratum to a low stratum, forming a

"continuous differential structure.,,12) The concept of Japan's "dual structure"

must, therefore, be clearly distinguished from the "dualism" found in Asian

underdeveloped countries.

Limiting ourselves to economic factors, the following points are of importance:

1. Duality may characterize the initial stage of development, and be limited

to the formation and utilization of the dualistic development explained by Hirschman,

namely the polarized co-existence of modern and pre-modern branches. However, after

the "take-off," described by Rostow1 3) and especially in the case of rapid progress,

pre-modern branches are to be combined with modern branches in a complementary

fashion.

12) Kazushi Ohkawa, [39], pp. 205-217.

13) W. W. Rostow, [44], pp. 25-48.

127

2.

production, while low wages due to an abundant supply of labor favour the existence

of medium and small enterprises.

opment.

and labor resources different from that of developed countries is clearly reflected

in the fact that modern production methods are shut out from various branches of

commerce and industry.

investments in industries which introduce new products.

Quite differently, at a more advanced stage of development, as in Japan, the

introduction of capital-intensive methods is required only for the improved

efficiency of

e~ting

3.

aspects.

From the international viewpoint, although capital intensity in large

enterprises is said to be high, the level is still lower than in developed countries.

Therefore, these enterprises use a system whereby they complement a productivity

relatively lower than the international level by low wages in subcontracting medium

and small enterprises.

scarce resource, and at the same time, it brings about the dependence of medium and

small enterprises on labor-intensive methods of production, as well as an incentive

to be subordinated to large-scale enterprises as subcontractors in order to escape

the instability of management resulting from poor and outmoded methods of production.

In this case, the permanence of pre-modern production branches is fundamentally

different from what happens in underdeveloped countries in Asia.

4.

Until the end of the 1950's (or the beginning of the 1960's) the Japanese

economy was characterized by excess supply of labor, and wages in the pre-modern

small enterprises tended to be given by the low level but with some upward trend and

128

cyclical fluctuations.

1960's, the demand for labor had an increasing trend due to rapid capital formation

and technological progress, and thus decreasing the wage differentials.

One of the

labor shortage economy, which will stimulate the process of adaptation and abolition

of the dual structure.

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133

INDEX

Advertising, effects of

Ara, K. i i

Artie, R. 75, 129

Employment:

--- expansion in service sector

79, 82

--- requirements 55

Enlarged inverse matrix multipl ier

5, 50

Expenditure of national income 2

External funds 114

External multipl ier 61, 88

--- of regions 66

--- of service sector 91, 98

local ized --- 72

80

Barna, 1. 129

Bhalla, A. S. 76, 79, 129

Borrowed funds, structure of

Branson, W. H. 10, 129

Brown, A. I3 I

116

Cao-Pinna, V. 129

Capital:

--- accessibi I ity I I I

--- accumulation 102

concentration 103, 124

--- intensity 105, 120

--- requirements 55

Capital-labor ratio ~ee Capital

intensity

Capital-output ratio 102

Chenery, H. B. 37, 65, 74 129

Chipman, J. S. 129

'

Circular flow of intermediate

products 44

Clark, C. 79, 129

Clark, P. G. 74, 129

Cobb-Douglas formula 105

Consumption I

--- function 4, 50

--- multipl ier 32

Convergence conditions 18

Cost-push, of service-prices 91

Cost schedule of investment funds

Final demand 2, 29

Financial institutions 116 119

Foreign trade multipl ier: '

modified --- 46

traditional --- 44

Fuchs, V. 80, 129

Funds of enterprises I I I

Galbraith, J. K. 80, 129

Galenson, W. 80, 129

Ghosh, A. 129

Goodwin, R. M. 129

Growth:

--- of enterprises 101

--- of service sector 79

fundamental equation of

114

Debreu, G. 129

Decomposabi I ity 17, 19

Dependence effects 80

Differentials 101

in capital intensity 105, 121

in funds 113, 119

in interest rates 113 117, 123

in productivity 105 '

in wages 104, 120

Direct and indirect requirements 37,55

Distribution of income:

general ized pattern of --- 4

regional --- 29

Distribution of loans 119

Dual structure 108, 126

Dua Ii sm 100

Dusenberry, J. S. 115, 129

Economic growth

~ee

Growth

101

Hawkins, D. 130

Herste in, I. N. 129, 130

Hirschman, A. O. 100, 130

Import:

--- function 47

--- requirements 55

Income distribution ~ee Distribution

of income

Income formation, fundamental

equation of --- 9

Income multipl ier:

interrelational --- 6, 26

macrocosmic --- 2 II

multi-sector --regional --- 29, 36

Income originating (or recievedl

basis 81

Indirect financing method 124

Input-output systems 4, 48

--- and consumption function I, 43

134

general fzation of --- 3

partition off --- 60

Inside propagation ratio:

--- of goods-producing sectors 86

--- of interregional model 66

Interest rate:

different i a lsi n

113, 117, 123

rea I --- 114

Inter-income-group coefficients 8

Interindustry multipl ier ~ee Inverse

matrix multipl ier

Internal funds 114

Internal multipl ier 60, 88

--- of regions 66

--- of service sector 91, 98

re-partitioned --- 71

Interregional model 23

of income formation 29

--- of output determination 37

--- repercussion model 65

I nterre Iat i ona I income mu Itip I i er

6, 26

Inverse matrix:

enlarged --- 5, 50

existence of --- 14

Leontief --- 4, 62

partitioned --- 60

Investment:

--- funds I 14

--- multipl ier 32

I sa rd, W. 65, I 30

Iso-quant of production 121

Kaldor, N. II, 22, 130

Ka I ec k i, M. 2, 2 I, I I I, I 30

Kalecki multipl ier 3, 12

Keynes, J. M. 130

Keynesian multipl ier 2, I I, 56

Labor:

--- market 104

--- requirements ~ee Employment

requirements

excess supp Iy of

I 10, 125

Large enterprises 102, 115

Leakage 32, 36, 45, 68

Leont i ef, W. W. I, 22, 65, 130

Leontief multipl ier 2, 56, 60

Leontief-type matrices 15

Loans:

concentration of --- 120

distribution of --- 119

Local ized partitioned matrix

mu Itip I i er 71

Long-term debt I I I

Marginal suppl iers of funds 116

Marx, K. 76

Marxian approach, on national

products 76

Masegi,S. 1,43,131

Material-coefficients 47

Matrix multipl ier:

--- of income formation 9

--- of output determination ~ee

Inverse matrix

Meaningful solutions, existence of 14

Medium and sma I I enterprises 101, 110,

116

Miyazawa, K. I, 13, 75, 130, 131

Morgenstern, O. 131

Moses, L. N. 37, 65, I31

MPS <material product system) 77

Multi-sector income multipl ier 9

National economic accounting

systems 76

Non-negative matrix 15

Ohkawa, K. 126, 131

Open economy:

--- and input-output model 43

fundamental equation of --- 47

Output multipl ier:

enlarged --- 5

macrocosmic --- 2

partitioned --- 62

regional --- 37

standard --- 4

Owned capital 102, III

Partition off matrices 60, 71

Patrick, H. T. 76

Permutation 18

Pre-modern industries 100

Price formation 92

Production function 108, 122

Productive labor 76

Productivity:

curve 108

--- differentials 105

--- of service 80

fundamental equation of

102

Propagation process:

intersectoral --- 61, 72

structure of --- 12, 46, 56, 78

Propensity to consume domestic

goods 46

Rasmussen, P. N. 131

Regional concentration of incomes 28

Regional income multipl ier 23

Regional model ~ee Interregional model

Relative prices of factors 122

Repercussion process ~ee Propagation

process

Rob i nson, J. 109, 131

Rostow, W. W. I26, I31

Sato, R.

ii

135

Self-sufficient ratio 32

--- of materials 45

Service:

--- activities 76

expansion multipl ier of --- 78, 81

income-elastisity of demand for

78

interdependence --- and goodsproducing sectors 85

Shinohara, M. 82, 105, 131

Shionoya, Y. 76

Simon, H. A. 130

Simultaneous permutation of matrix 18

Smal I enterprises 101, 116, 125

Smith, A. 76

SNA (system of national accounts) 76

Solow, R. M. 16, 80, 131

Solow's theorem 16

Solutions, existence of ~ee Meaningful

sol utions

Ste i nd I, J. I I I, 131

Stone, R. 10,131

Subcontracting 110, 125

Subjoined inverse matrix 5, 51, 55

Sub-matrix-multipl ier 61, 73

--- of goods-producing activity

88, 93

of price formation 92

--- of service activity 88, 93

regional --- 68

Sub-multipl ier process 44

leakage coefficients of --Suzawa, G. iii

45

Take-off 126

Technical innovation 110

Tertiary sectors ~ee Service

Trade activity 95

Traditional sector ~ee Pre-modern

industries

Transfer of income, between goods and

service sectors 81

Transportation 95

Truncated multipl ier 14

Unproductive labor

Value-added:

mu Itip I i er

ratio 4

sector 10

76

51

Watanabe, T. i i

Waugh,' F. V. 131

Woodburry, M. A. 15,131

1971.

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