the beginning of the end or the end of the beginning for the bse crisis?

Food Policy,Vol. 23, No. 3/4, pp. 231–240, 1998 1998 Elsevier Science Ltd. All rights reservedPergamon

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The beginning of the end or the end ofthe beginning for the BSE crisis?

Paul Caskie* and Joan E. MossDepartment of Agricultural and Food Economics, The Queen’s University of Belfast,Newforge Lane, Belfast BT9 5PX, UK

John DavisGibson Institute for Rural Studies, The Queen’s University of Belfast, Belfast BT9 5PX,UK

The BSE crisis raises doubts about the sustainability of current levels and patterns ofbeef production in Northern Ireland, a region with a heavy dependence on exports.This paper employs a regional input–output model to determine the full effects of apermanent fall in export demand for beef on regional output, income and employmentin farming and the wider economy. The scenario examined, which assumed the with-drawal of Intervention buying, illustrates the dependence of the beef industry on BSE-triggered market stabilisation measures, without which more than 5000 jobs and£68 million in income would be threatened. The countervailing effects of possibleincreases in demand for beef substitutes are shown to offer relatively limited opport-unities for employment: 600 jobs and £9 million in income. In view of the extent of thedislocation caused by BSE in the regional economy, it is concluded that rather than tryto sustain the existing pattern of production with the present mix of support measures,additional agricultural and rural development policy responses are required. The logi-cal aim of the new measures should be to promote structural adjustment in the beefsector, thus enhancing competitiveness by improving underlying regional comparativeadvantage in beef production and processing. 1998 Elsevier Science Ltd. All rightsreserved.

Keywords: BSE, beef, input–output, regional economy, rural development, exports

Introduction

Following the on-set of the BSE crisis, the UK Government implemented measures to supportthe beef sector. The value of compensation paid and other additional public expenditureincurred for the UK as a whole in 1996/97 was approximately £1500 million (DTZ PiedaConsulting, 1998, p. 14). It is understood that a number of measures, designed to counter theeffects of BSE, will continue to operate for the foreseeable future, albeit at a reduced cost tothe exchequer (MLC, 1998a, p. 7). Thus, there is considerable interest surrounding the sus-tainability of this level of support for an extended period.

*To whom correspondence should be addressed. Fax:1 44(0) 1232-255-327; E-mail: [email protected]

231

232 The beginning of the end or the end of the beginning for the BSE crisis?: P. Caskieet al.

Agriculture, and especially beef production, are very significant elements of the economyin Northern Ireland. The beef industry alone generated sales of approximately £375 million in1995. Of this, about 80% (by volume) was marketed outside the region and about 54% outsidethe UK. The sector employed an estimated 15,000 people at farm level and 2850 people inprocessing (Department of Economic Development, 1996). At a sub-regional level, agricultureand beef farming in particular continues to be most important in those peripheral areas wherealternative employment opportunities are more limited (Department of Finance and Personnel,1997). Consequently, the impact of a sustained ban on beef exports is likely to be particularlysevere for the regional economy.

As a contribution to the debate on the appropriate long term policy responses to BSE, thispaper analyses the potential economic effects of lower demand for Northern Irish beef in theabsence of state support to the beef market through the operation of Intervention purchases.Input–output analysis is used to capture not only the direct effects of a fall in demand on beeffarming in Northern Ireland, but also the wider impacts on allied industries and other non-agricultural sectors. Output, income and employment impacts arising from reduced demandfor beef are estimated, as are the countervailing effects of observed increases in demand forbeef substitutes. While the analysis is region specific, similarities in the structure of the beefindustry in Northern Ireland with those found in Scotland and Wales, give the results broaderrelevance within the UK.

Responses to the BSE crisis

The possible danger of BSE to human health has been commented on since the late 1980s(Holt and Phillips, 1988; Dealler, 1993; Sawceret al., 1993; Lacey, 1993). In response, concernamongst consumers in the early 1990s was estimated to have reduced beef’s share of the meatmarket by approximately 4.5% (Burton and Young, 1996). In March 1996, the Secretary ofState for Health, in the face of mounting evidence, announced that a possible link existedbetween new variant Creutzfeld–Jakob Disease (nvCJD) and exposure to BSE infected beef.Subsequently, the European Commission banned the sale of meat for human consumption fromcattle over 30 months old, both in the UK and other countries. A complete ban on exports ofall UK beef was imposed, although this was partly rescinded in June 1998 for specified herdsand classes of livestock in Northern Ireland. While the scientific evidence suggesting a linkbetween BSE and nvCJD was disputed at the time, subsequent studies have tended to supportthe initial claims (Collingeet al., 1996; Hoyle, 1997). Following the escalation of the crisisin 1996, both household and export demands for beef and beef products fell much more sharply.By the end of 1997, however, quarterly information on the consumption of butchered beef inNorthern Ireland (Department of Agriculture for Northern Ireland, 1998) and market analysisindicated that consumption in Northern Ireland had recovered all of the fall observed in theimmediate aftermath of the 20 March 1996 announcement. This market represented approxi-mately 20%, by volume, of beef disposals in 1997. The only other commercial market availablewas GB, which, although depressed, purchased a further 30% of regional output. Of the remain-ing production, 20% was disposed of through the Over Thirty Months Scheme (OTMS), while30% entered Intervention. This pattern of sales illustrates very well the dislocation that hasoccurred in the region’s beef sector. The re-emergence of Intervention as an important marketoutlet is in sharp contrast to the situation prior to the imposition of the beef export ban andthe OTMS: in 1994 and 1995, all beef production had a commercial outlet, with over 50%finding markets outside the UK.

233The beginning of the end or the end of the beginning for the BSE crisis?: P. Caskieet al.

Modelling changes in final demand

The model used in this study was designed to allow analysis of a wide range of market-basedinfluences and policy changes (Caskie, 1995). All economic activities occurring in NorthernIreland are included but only activities relating to farming and its ancillary industries aredescribed in detail. The overall economy is divided into 15 sectors, eight relating to farmproduction, six to the ancillary sectors — food processing and farm supplies; the final sector,constructed as a residual, relates to all other activities. The baseline year for which technicalrelationships were developed was 1994. More information on the theoretical backgroundto input–output analysis and the derivation of input–output multipliers can be found in theAppendix.

In input–output analysis, an exogenous stimulus to the economic system is introduced viaa change in final demand; in this case either household consumption or export demand. Anumber of limiting assumptions apply. Firstly, it is not possible for the model to determinehow prices will change in response to changes in demand or how price changes might affectsupply. However, although depressed prices have had a detrimental effect on farm incomessince the on-set of the BSE crisis, much of the recent decline in market prices has beenattributed to sterling’s appreciation against the ECU (MLC, 1998b, p. 11). Nevertheless, someimplications of the BSE-induced price changes are commented on outside the input–outputframework, in the final section of this paper. Secondly, there is an underlying assumption thatchanges in demand will not bring about input substitution or changes in the output mix. Wewould argue, however, that these assumptions should not be seen as excessively restrictive inthe case of this study. In Northern Ireland the moist climate, soil types, land topography andsmall average size of farms tend to limit farmers to largely grass-based livestock production.Policy instruments, such as milk quotas and headage entitlements, act as barriers to entry tosheep or milk production and further encourage production rigidity. Finally, limited opport-unities for off-farm employment and the predominance of one person farms also tend to reducelabour mobility out of agriculture. Thus despite its limitations, input–output analysis providesa form of general equilibrium model that is unique in capturing the extent and importance ofcomplex economic linkages: in this instance, activity between beef production, other farmsectors, ancillary industries and the non-agricultural economy.

Modelling scenario

Following the market analysis described above, beef sold into Intervention was deemed to bethat portion of supply for which no effective demand existed at the prevailing UK price. Meatdestroyed under the OTMS was considered to have no marketable value now or in the future.It was assumed that the scheme would continue to operate to dispose of culled breeding stockfor an indefinite period and beef entering OTMS was, therefore, not included in the analysisundertaken. Concurrent with the fall in demand for beef, modest increases in demand for beefsubstitutes (poultry, lamb and pork) have been observed in GB (MAFF, 1997). It was assumedthat higher demand for beef substitutes would lead to proportionate increases in production ofthese products in Northern Ireland.

The analysis proceeded as follows. Firstly, the impact of a long-run BSE-induced fall inbeef demand was estimated. Secondly, the effects of a simultaneous increase in demand forsubstitutes was measured. Finally, the net impact on regional outputs, incomes and employmentwere considered.


Impact analysis for beef

During 1997, approximately 48,000 tonnes of Northern Ireland beef entered the Interventionsystem. This was equivalent to 32% of 1995 output and was interpreted as a fall in finaldemand that occurred between 1995 and 1997. It may be regarded,ceteris paribus, as anindicator of likely future excess production in the region’s beef sector. The value of this beefat 1994 wholesale prices was £140 million. The impact of this fall in demand for beef onoutput, incomes and jobs is presented in Table 1.

Gross output

The aggregate reduction in gross output for all sectors was £251.5 million, while for every £1reduction in final demand for beef exports, a further £0.80 was lost elsewhere: an outputmultiplier of 1.8. The impact on the abattoir sector was considerable and represented about 27%of its 1995 output. A small reduction in output from milk processing reflected the reduction indemand for dairy based inputs to the feed compounding industry.

At farm level, reduction in final demand for beef lowered output from both the beef anddairy herds by a combined £72.9 million. This represented about 23% of the value of farmgate beef output in 1995, not including payments such as beef special premium, suckler cowpremium and other non-price subsidies. The cereal sector was also significantly affected as aconsequence of the double impact of reduced direct demand for cereals for farm-mixed rations,and lower indirect demand from the feed compound sector. A similar analysis for other regionsof the UK, however, might show a greater reduction in cereal output. Northern Ireland has alow level of cereal self-sufficiency and imports the majority of grain used in animal feedcompounding. When demand for animal feeds in the region falls the impact is largely trans-mitted to grain producers elsewhere.

Compound feeds manufacturers and fertiliser producers were predicted to lower output, againin response to reduced production at farm level. As with all the sectors in the model, the fallin fertiliser output reflects only that proportion of total inputs that are produced in Northern

Table 1 The effects of a fall in beef exports on gross outputs, incomes and employment in Northern Ireland

Model sectors Change in gross output Change in income Change in employment(£m) (£m) (total numbers)

Cereals 22.4 21.3 247Potatoes — — —Horticulture — — —Dairying 26.4 23.7 2169Sheep — — —Pigs — — —Poultry — — —Beef 266.5 239.7 23392Poultry processing — — —Milk processing 20.4 — 22Abattoirs 2140.1 212.7 21051Pig processing — — —Feed compounding 210.7 20.8 239Fertiliser 23.2 20.5 225All other sectors 221.8 29.4 2410Net total 2£251.5 2£68.1 25135

Note: ‘—’ indicates a negligible, or zero change.


Ireland. Although the region has a sizeable fertiliser manufacturing industry, there are alsosignificant imports. The fall in imports does have some effect on firms distributing importedfertiliser, but this is captured in the effect on the ‘all other sectors’ category. A number offactors are likely to have affected this category, mainly lower demand from the processingand farm sectors for the many activities not detailed elsewhere in the model.

Incomes

The aggregate loss of income to the regional economy was estimated to be £68.1 million. Beeffarming was the most severely affected, accounting for 58% of the total fall in income. Theexplanation for the disproportionately high impact on farm incomes lies in the higher levelsof wages and profits per unit of output associated with farming activities in general. Thisreflects the contrasting industrial structure and conditions of demand between farming andmost other sectors. The abattoirs sector is a good example of this contrast. Whereas small-scale beef producers tend to achieve relatively more value added per unit of output, slaughteringcompanies operate on substantially lower margins but much higher volumes. Thus, althoughoutput in slaughtering was predicted to fall by £140 million, income would be reduced byonly £12.7 million.

Employment

In total 5135 full-time job equivalents were predicted to be threatened by the reduction indemand for beef, approximately 0.7% of the total regional employment. The impact is mostpronounced in the beef farming sector where 66% of total losses are predicted to occur. The3392 jobs under threat in this sector represented about 20% of the total employment supportedby beef farming in 1995. The dairying and cereals sectors are also affected but to a muchlesser extent. Some caution must be used when interpreting these employment numbers. Somefarmers may respond by increasing or introducing other farm activities. Others may be forcedto continue in beef production, despite worsening economic conditions, because of a lack ofalternative on or off-farm employment.

Some 1051 job losses were predicted in the abattoir sector, about 37% of 1995 employment.The reductions in employment in the feed compounding (4.5%) and fertiliser (5.5%) industrieswere much less severe. An accurate breakdown of job losses in the ‘all other sectors’ categorycannot be determined, but it is likely that the majority will occur in distribution.

Impact analysis for beef substitutes

Following the BSE crisis, it is known that consumers switched consumption to substitute meats,i.e. poultry, lamb and pork. This behaviour may be understood in terms of an assumed constantconsumer meat budget. Analysis of consumption levels for beef substitutes in Northern Ireland(Department of Agriculture for Northern Ireland, 1998) showed the initial increase in demandfor pork and poultry in the second and third quarters of 1996 was not sustained in 1997. Therewere, however, sustained increases in consumption in GB: poultry (7%), lamb (7%) and pork(6%). It was assumed that Northern Ireland suppliers of these products experienced commen-surate increases in demand. This implied increases in regional final demand of £12 million forpoultry products, £3.5 million for lamb and mutton and £7 million for pork. The impact onregional gross outputs, incomes and employment is presented in Table 2.


Table 2 The effects of a rise in export demands for beef substitutes on gross outputs, incomes and employmentin Northern Ireland

Model sectors Increase in gross output Increase in income Increase in employment(£m) (£m) (total numbers)

Cereals 0.4 0.2 7Potatoes — — —Horticulture — — —Dairying 0.2 0.1 6Sheep 1.6 0.8 96Pigs 2.5 0.7 74Poultry 3.3 0.8 29Beef — — —Poultry processing 12.0 2.5 188Milk processing — — —Abattoirs 3.5 0.3 26Pig processing 7.0 1.0 89Feed compounding 4.0 0.3 14Fertiliser 0.1 — —All other sectors 4.7 2.0 88Net total £39.3 £8.7 617


Gross outputs

The increased demand for beef substitutes from GB produced an aggregate increase in outputof £39.3 million. The implied multiplier was 1.75. The sectors slaughtering and processingbeef substitutes benefited significantly from the changes in demand. Some of this additionalactivity was passed on to production at farm level, although as the concentration of valueadded activity was in the downstream stages of the food chain there was a smaller impact onprimary production.

Feed compounding and cereal production benefited from the knock-on effect of higherdemand for pig and poultry products, as both sectors make intensive use of animal feeds intheir production systems. Conversely, the substitution of a grass-based beef product by inten-sively produced pig and poultry meats meant that the fertiliser industry gained little from thechange in consumer preferences. The increase in grass-based sheep production had some posi-tive effect on fertiliser output, but this was limited by the more extensive management systemswhich predominate in this sector, and the substantial volume of imports.

Income

Economy-wide increases in income arising from higher demand for beef substitutes of£8.7 million were predicted. Poultry processing was the largest beneficiary. Of the remainderapproximately 23% accrued to the non-agricultural economy.

Employment

An increase in regional employment of 617 full-time job equivalents was predicted. Most newjobs (49%) were in the meat processing sectors; sheep farming would also experience expan-sion in employment. Feed compounding gains from higher demand for feeds from pig andpoultry farming. As with the loss of jobs predicted in beef farming, some caution must beused in the interpretation of the increases in farm employment, e.g. from sheep production.Most farming units in Northern Ireland are family owned and operated. Structural rigidities,


Table 3 The net effects on incomes and employment of a combined fall in demand for beef and a rise indemands for beef substitutes in Northern Ireland

Model sectors Change in income (£m) Change in employment (total numbers)

Cereals 21.1 240Potatoes — —Horticulture — —Dairying 23.6 2163Sheep 10.8 196Pigs 10.7 174Poultry 10.8 129Beef 239.7 23392Poultry processing 12.5 1188Milk processing — 22Abattoirs 212.4 21025Pig processing 11.0 189Feed compounding 20.5 225Fertiliser 20.5 225All other sectors 27.4 2322Net total 2£59.4 24518


not incorporated into the modelling process mean that expansion in sheep production is likelyto occur on farms with existing sheep flocks and may not involve additional labour resources,especially as there is significant under-employment on farms.

Net impacts

The overall impact of BSE-induced changes in demand for meat products can now be assessed.By combining the impacts of reduced demand for beef and increased demand for beef substi-tutes the net effects at sectoral and regional levels can be determined (Table 3).

Despite the positive substitution effects, the net impact on the regional economy was severelynegative. In particular, the magnitude of the contraction in beef farming presented a substantialthreat to employment. The analysis confirms the importance of the beef export market to theregion’s economy, and has to be considered in the context of the limited opportunities forexpansion in other agricultural sectors.

Despite increased purchases of feeds and grains by the pig and poultry sectors, the scale ofthe contraction in beef production outweighed predicted gains for cereal farming and feedcompounding by a factor of almost 4:1 for both income and employment.

Finally, the non-farm economy also displayed strongly negative results for output, incomeand employment. The majority of the 322 net job losses would be expected to occur in thoseareas of Northern Ireland where beef farming and processing are most important; predominatelyin the more disadvantaged districts.

Summary and conclusions

The partial removal of the export ban, for beef originating from specified herds in NorthernIreland, has provided the necessary legal framework for a resumption in international beeftrading. It is likely, however, that beef exporters will experience considerable difficulty inregaining markets lost in 1996. A number of factors are relevant. Firstly, the level of consumer


resistance to beef from the UK is as yet unknown, but some at least should be anticipated.Secondly, it is thought that over-dependence on supplies of beef from Northern Ireland priorto 1996 caused sourcing and marketing difficulties for a number of European retailers whenthe export ban was put in place. To avoid the risk of similar exposure in the future, retailersare unlikely to become as dependent on a single supplier or country of origin. Finally, in anenvironment where growth in EU beef stocks is predicted (FAPRI, 1998), competition is likelyto remain intense, with any recovery of markets depending on the ability to displace othersuppliers. It seems likely, therefore, that BSE-related demand effects will persist into themedium term.

The importance of beef production, including beef exports, to the rural and wider economyof Northern Ireland was demonstrated by the pattern and magnitude of economic linkagesestablished by the input–output analysis. Beef exports generate considerable economic activityin the region, each £1 million in demand yielding almost £0.5 million in profits and incomes,and supporting 37 full-time jobs. Market analysis showed the present economic dependenceof the beef industry on stabilisation measures, a situation that is likely to continue unless thereis a substantial recovery in export sales of beef. Under a scenario which excluded the possibilityof sales to the Intervention system, the potential long-term effects of a BSE-induced fall inexport demand for beef on the regional economy were estimated. It was found that up to 5000full-time job equivalents could be threatened and income and profits of £68 million put at risk.Any reduction in incomes and profits would be most acutely felt by beef farmers, whom itwas estimated would bear 58% of predicted overall income losses in the region. Other farmingsectors would bear 7% of anticipated income losses, ancillary sectors 21% and the remainderof the rural and non-rural economy 14%. The employment effects were also dispersed butwere again predicted to impact more severely on beef farming than on other sectors: 66% oftotal job losses were concentrated in the sector. Other farm sectors accounted for 4% of employ-ment losses, ancillary sectors 22% and the remainder of the economy 8%. Compensating gainsdue to increased demand for other meats were anticipated, but these were found to be relativelyminor in comparison to the effects of lower demand for beef. Each £1 million change indemand for beef substitutes was estimated to generate approximately £0.4 million in profitsand incomes and support 27 full-time jobs. In aggregate, this was expected to create approxi-mately 600 jobs and generate almost £9 million in incomes and profits.

A consequence of limited market demand and continued reliance on support mechanismswill be downward pressure on producer prices for beef. Prior to the BSE crisis, steer pricesin Northern Ireland were higher than the UK average, but this differential has been reversedsince 1996 (Agra Europe, 1998). Combined with cost increases connected with new monitoringand control systems for beef production and processing, a principal legacy of BSE for theNorthern Ireland beef sector is likely to be reduced profitability. Under these conditions thelonger-term sustainability of current levels and patterns of beef production in the region isuncertain, given existing levels of efficiency in this sector of the food chain. Furthermore,relying on the Intervention system for the disposal of a large proportion of production is notviewed as sustainable or desirable for the development of a competitive, market-oriented indus-try. It also leaves the beef industry vulnerable to changes in direction in agricultural policy.

As a result of these influences, it is possible that a ‘bi-modal’ structure may emerge in beeffarming. At current levels of income it is, arguably, medium-sized beef farming units whichmay be most vulnerable to income pressure. This could accelerate the twin trends towardsmore small, part-time, beef farms and relatively few large-scale production units. The switchto part-time farming, however, is conditional on the availability of alternative off-farm employ-


ment. Such opportunities are limited in Northern Ireland: indeed, in view of the spatial distri-bution of beef farming in the region, it is apparent that the greatest need would be found inthose districts which already suffer the severest economic disadvantage. Thus it is argued thatthere are policy implications for both agriculture and rural development.

Clearly, every effort will be made to secure market access for beef from Northern Irelandand to restore consumer confidence in the safety of the product. Nevertheless, a significantreduction in exports sales must be anticipated. As a result, these initiatives may well need tobe augmented by structural adjustment programmes that seek to consolidate farming units andpromote competitiveness based on underlying regional comparative advantage. At the sametime it could be argued that those in agriculture, who cannot achieve satisfactory living stan-dards, may need assistance to withdraw, either partly or completely, from the industry. Thiswill increase the importance of rural development initiatives aimed at enhancing the capacityof the human capital base and promoting indigenous small enterprises and inward investmentin rural areas. However, the efficacy of such policy interventions to ameliorate deep seatedproblems has yet to be proven.

ReferencesAgra Europe (1998)Low Prices Hitting Northern Ireland Beef Sector. 1800, M/4–M/5.Burton, M. and Young, T. (1996) The impact of BSE on the demand for beef and other meats in Great Britain.

Applied Economics28, 687–693.Caskie, P. (1995) An input–output analysis of agriculture in Northern Ireland. Unpublished PhD Thesis. The Queen’s

University of Belfast.Collinge, J. (1996) Molecular analysis of prion strain variation and the aetiology of ‘new variant’ CJD.Nature383,

685–690.DTZ Pieda Consulting (1998)Economic Impact of BSE on the UK Economy. DZT Pieda Consulting, Manchester.Dealler, S. F. (1993) Bovine Spongiform Encephalopathy (BSE): the potential effects of the epidemic on the human

population.British Food Journal95, 22–34.Department of Agriculture for Northern Ireland (1998)Household Food Consumption and Expenditure Results for

Quarter 4 1997 and Annual Figures for 1997, Press Release, 77/98.Department of Economic Development (1996)The Food Industry-Consultation Paper. Food Division.Department of Finance and Personnel (June 1997)Quarterly Economic Report. Economics Division.FAPRI (Food and Agriculture Policy Research Institute) (1998)World Agriculture Outlook 1998. Washington DC.Holt, T. A. and Phillips, J. (1988) Bovine Spongiform Encephalopathy.British Medical Journal1296, 1581–1583.Hoyle, R. (1997) The link between Creutzfeld–Jakob disease and BSE.Nature—Biotechnology15, 295.Lacey, R. W. (1993) The gathering crisis.British Food Journal95, 17–21.MAFF (1997) National Food Survey. INF 2/97; INF 3/97, Food Safety Directorate Information.MLC (1998a)Meat Demand Trends, 98/2. MLC Economics Services, Milton Keynes.MLC (1998b)United Kingdom Meat Market Review, May 1998, No.21. MLC Economics Services, Milton Keynes.Sawcer, S. J. (1993) Creutzfeldt–Jakob disease in an individual occupationally exposed to BSE.Lancet341, 642.United Nations (1973)Input Output Tables and Analysis. Studies in Methods, Series F, No 14, Rev 1. United Nations,

New York.

Appendix

The foundation of input–output analysis is a breakdown of aggregate accounting flows amongstproducing sectors and between producing sectors and final demand, to form a balance equationbetween production and consumption (United Nations, 1973). The relationships can beexpressed in matrix notation thus

q 5 Aq 1 f (1)

where


q is a vector of commodity outputs;A is a square matrix of technical (average) input–output coefficients; andf is a vector of commodity final demands (exports, household consumption).

As the values of the technical coefficients are known and the level of final demand is knownor assumed, it is possible to solve equation (1) and find the levels of output of various com-modities,q, as follows

q 5 Aq 1 f

q 2 Aq 5 f

(I 2 A)q 5 f

q 5 (I 2 A)−1 f (2)

The matrix (I 2 A)−1 is known as the matrix multiplier or Leontief inverse. Each elementof the matrix is an interdependence coefficient which shows the total input requirements, bothdirect and indirect, of commodityi used to produce one unit of commodityj. The columnsums of the matrix (I 2 A)−1 describe the total effect on gross output in the economy givena unit change in final demand for a given output. This is the output multiplier, represented by:

OMj 5 Oni 5 1

bij

where

bij are interdependence coefficients that represent the direct and indirect amount of com-modity i used to produce one unit of commodityj.

Income multipliers are based on the existence of a functional relationship between changesin final demand and changes in income received by households and other factors. Multipliersof this type are, therefore, ratios of an initial effect and a complete effect. The income multiplieris represented by:

IMj 5vj

wj

where

vj is the total effect on incomes (the direct plus indirect effect) of a unit change in finaldemand for sectorjwj is the average input of income needed to produce a unit of output in the sectorj, (sectorj income divided by sectorj gross output).

Employment multipliers are derived in the same way as those for income except that insteadof using the relationship between income and output, the relationship between output and aspecified number of jobs is substituted.

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