Local Economic Model

Milltown U.S.A.

SIMPLIFIED LOCAL ECONOMIC MODEL

(http://faculty.washington.edu/~krumme/207/development/model.html)

Supporting Pages:

Economic Base Concept (Home Page)
Local Employment Multipliers
Input-Output Analysis (Home Page)
A Student's Illustration of (Below) Model [created by Wes Shepherd (350/2000)]
Multiplier Exercise

The Payment - Transaction Model

-- in absolute $ terms --

The general model



                                   Savings
             Milltown              -------
         Gray Cloth Corp.             ^
              (MGCC)                  | $.08
         (=export sector)             |
             _______               ___|_____
             |     |               |       |
             |  M  |               |       |        Direct Household
 $ 1.00      |  G  |               |       |  $.08  Imports
Exports to   |  C  | Wages: $.80   |  Hh   |-------)(Mail/E-Commerce,
American     |----------------)    |       |        Tourism etc.)
Textile Corp.|     |               |_______|
(ATC) --------)____|                 |   ^
in BigCity      |                $.64|   | $.16
                |                    |   |
                | $.20               V   |
                |               ________________
                |               |              | $.48   Import Payments
                V               |Local Services|-------)(Hondas from Ohio)
             Import             |______________|
             Payments

The Coefficient Model



				   Savings
			           -------
				      ^
				      | .1
        _______                       |
	|     |			   _________	
	| IEA |			   |       |
	|  ^  |			   |       |	    Direct Household
        |  |  |                    |       |        Imports
 	|  |  | Wages / Salaries   |  Hh   |-------)(E-Commerce,
	|  |  |---------------------)      | .1     Tourism etc.)
Exports	| DEA |      elc = .8      |_______|
 --------)____|			     |   ^
	   |			 pcl |   | iclcs
	   |			 .8  |   | .25
	   |			     V 	 |
	   | .2		          ________________
	   |			  |              |  .75	  Import Payments
	   V			  |Local Services|-------)(Hondas from Ohio)
	-------		          |______________|
	Import
	Payments

Hh = Households
DEA = Direct Export Activities
IEA = Indirect Export Activities
elc = export labor coefficient (labor intensity of DEA & IEA)
pcl = propensity to consume locally
iclcs = income created per (dollar of) local consumption sales
........(wages/salaries/profits)

What is a "Multiplier"?

EXAMPLE:  pcl =   .8
	  iclcs = .25
				1			1
	  Multiplier =   -----------------   =       ------     =   1.25
			   1  -  .8 x .25              .8

          elc = .8
	  
	  Export Sales:   			$ 1 million
	  Local Export Income: 1 mill x .8	$ 800,000     
	  Total Local Income:  .8mill x 1.25  $ 1,000,000  
	  Total "Induced" Income:		$ 200,000
	  ("induced" by local household consumption expenditures)

Transactions Table (in millions US$)

			 Export		Local     	Households  |  Exports
			 Sector        Services                     |
---------------------------------------------------------------------
Export Firm/Sector	   -		   -		     -      |  1.00
								    |
Local Service Sector	   -		   -		    .64     |
								    |
Households		   .80		   .16		     -      |
								    |
Imports			   .20		   .48		    .08     |
								    |
Savings			   -		   -		    .08	    |
---------------------------------------------------------------------
Total Inputs		  1.00		   .64	            .80     |
---------------------------------------------------------------------

Direct Coefficients Table


			 Export		Local     	Households  |
			 Sector        Services                     |
---------------------------------------------------------------------
Export Firm/Sector	   -		   -		     -      |    
								    |
Local Service Sector	   -		   -		    .8      |
								    |
Households		   .800		   .25		     -      |
--------------------------------------------------------------------|
Imports			   .200		   .75		    .1      |
								    |
Savings			   -		   -		    .1      |
---------------------------------------------------------------------
Total Inputs		  1.000		  1.000	           1.000    |
---------------------------------------------------------------------

Questions:

Why does one table have an export column, while the other does not? (while both tables have "import" rows)

In the "Direct Coefficients Table", why are there no values in the rows associated with the export sector?

Why do the coefficients add up to one in columns, but not in rows?

Why is there a line separating households and imports in the Direct Coefficients Table? (In other words: Why are "imports" and "savings" treated differently [compared with the other rows]?)

Were you able to answer all questions? Congratulations! (Let's move from Milltown to a somewhat more articulated model of the Holukuluku economy and its own questions!)