An Input-Output Model Building for Nine Regions of Japanese Economy Based on Microeconomic Foundation

Input-output table depicts the economic activity as a system of interrelated commodities, services, and final demand. Input-output analysis is utilized to explain economic changes in today’s economy, which lead to useful insights to us. However, we advocate that input-output model should have more sophisticated framework which reaches to the microeconomic theory. The purpose of this study is to construct the input-output system, where the output and price is interdependently determined under the optimization of household and producer in imperfect market. This approach is incorporated into the construction of an interregional economic model in Japan by using interregional input-output tables of eight data points collected in five-year increments from 1965 to 2000 of Japan. Thus, intermediate demand, consumption expenditure, labor demand, and price determination are endogenized in an interregional input-output system, where: a) consumption expenditure is explained by the Almost Ideal Demand System in which expenditure minimization is a key factor ; b) intermediate and labor demand are derived from the generalized Ozaki cost function; and, c) sector price is determined by an monopolistic market. This interregional system is incorporated into an interregional input-output model of nine regions. We simulated the model and made some indices of expressing structure of Japanese economy such as economy scale, elasticity of price or demand, technical progress, and total factor productivity. These results can assure potential use of input-output model for practical policy recommendation, because we model the consumer preferences, production technology and resource constraints that govern economic agent’s behavior. We would believe that our attempt will contribute to potential applicability of input-output model.