On the dynamics of net versus gross multipliers

Industries often promote their interests by arguing that they have a big impact on the rest of the economy. To substantiate such claims usually some measure of size (employment or value added) is labelled the direct effect and is then multiplied with the corresponding (gross) multiplier to calculate what is labelled the total impact of the sector or project at hand. To avoid double-counting impacts and to solve the endogenous/exogenous mix-up involved the net multiplier concept was introduced (Oosterhaven and Stelder, 2002). Both the standard (gross) multiplier and the new net multiplier are essentially static concepts. When applied in a dynamic setting the question of stability rises. The stability of the gross multipliers from the standard input-output model is based on the stability of its input coefficients. The stability of net multipliers is also based on the stability of its additional exogenous demand/total output ratios, which are unstable by definition. This note will argue that this property should not be seen as a vice but as an additional virtue of the net multiplier concept. In a closed economy, assuming fixed input price ratios, the stability of the input coefficients is a technological feature. In an open regional or national economy, with growing exogenous demand, gross multiplier stability also implies the absence of import substitution. This is unlikely whenever the growth of exogenous demand is substantial. The net multiplier concept forces the user to consider not only import substitution but also export substitution explicitly. Depending on the relative size of import versus export substitution, the net multiplier may either rise or fall, whereas the gross multiplier only rises when the economy grows. From this, the paper argues that using net multipliers is more appropriate than using gross multipliers not only in a static setting but also in a dynamic setting, that is when judging the relative importance of industries is the issue.

On the definition of key sectors and the stability of net versus gross multipliers

Industries often promote their interests by arguing that they have a large impact on the rest of the economy. The same line of reasoning is used when so-called key sectors for economic development are searched for. In both cases, a one-sided view of the dependence of the rest of the economy on the sector at hand is used, and sectors with large forward and backward linkages are selected as being strategically important to the region or nation at hand. This onesided approach, however, disregards that the sectors selected may be heavily dependent on the rest of the economy, and may therefore in fact not be able to generate the growth impulses that their larger linkages are assumed to pass on to the rest of the economy. To avoid doublecounting impacts and to reckon with the two-sided nature of the dependency between a sector and the economy at large, the net multiplier concept is shown to provide an adequate solution. However, both the standard (gross) multiplier and the new net multiplier are essentially static concepts. When the search is for strategic sectors for future development, the question of the stability of both measures unavoidably arises. Besides the stability of the input-output coefficients, the stability of net multipliers is also based on the stability of its additional “exogenous demand/total endogenous output” ratios, which are unstable by nature. We argue that this property should not be seen as a vice, but as an additional virtue of the net multiplier concept, as it forces the analyst to explicitly consider this inherent instability instead of assuming the problem away as is usually done when gross multipliers are used.

Regional Labour Productivity in The Netherlands - Diversification and Agglomeration Economies

This paper studies the extent to which diversification and agglomeration effects account for regional differences in labour productivity levels and labour productivity growth. Using a large set of regional data for The Netherlands for 40 labour market areas between 1990-2001 we find that roughly 60% of the explained variation in regional productivity differences and 55% of the regional growth differences can be attributed to indicators of diversification and agglomeration effects. A sensitivity analysis shows that these effects are fairly robust.

On the dynamics of net versus gross multipliers

Industries often promote their interests by arguing that they have a big impact on the rest of the economy. To substantiate such claims usually some measure of size (employment or value added) is labelled the direct effect and is then multiplied with the corresponding (gross) multiplier to calculate what is labelled the total impact of the sector or project at hand. To avoid double-counting impacts and to solve the endogenous/exogenous mix-up involved the net multiplier concept was introduced (Oosterhaven and Stelder, 2002). Both the standard (gross) multiplier and the new net multiplier are essentially static concepts. When applied in a dynamic setting the question of stability rises. The stability of the gross multipliers from the standard input-output model is based on the stability of its input coefficients. The stability of net multipliers is also based on the stability of its additional exogenous demand/total output ratios, which are unstable by definition. This note will argue that this property should not be seen as a vice but as an additional virtue of the net multiplier concept. In a closed economy, assuming fixed input price ratios, the stability of the input coefficients is a technological feature. In an open regional or national economy, with growing exogenous demand, gross multiplier stability also implies the absence of import substitution. This is unlikely whenever the growth of exogenous demand is substantial. The net multiplier concept forces the user to consider not only import substitution but also export substitution explicitly. Depending on the relative size of import versus export substitution, the net multiplier may either rise or fall, whereas the gross multiplier only rises when the economy grows. From this, the paper argues that using net multipliers is more appropriate than using gross multipliers not only in a static setting but also in a dynamic setting, that is when judging the relative importance of industries is the issue