Economic and Policy Implications of Industry Interdependence: An Input-output Approach

Abstract

The study provides an overview of the fundamental principles of input-output theory, the steps involved in linkage analysis and the estimation of industry multipliers. These have been estimated using a ‘new’ symmetric input-output table for the Maltese economy for 2007 which is used as an example to draw policy-relevant lessons for countries with relatively small open economies. On the basis of these estimates it is argued that (1) the effect of an increase in final demand will go beyond the industry directly affected by the initial change in expenditure, (2) that multipliers provide an important guide to policy makers that are concerned with making optimal use of their scarce resources, (3) that governments of countries that depend heavily on foreign direct investment can target labour intensive industries to tilt the balance in favour of the worker, (4) that a firm-specific approach is preferable to expansionary fiscal policy when a country is heavily dependent on imported products, and (5) that market distortions and inefficiencies are more damaging in those sectors that have strong forward linkages with other sectors in the domestic economy.

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