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I want to estimate how much labor time would have to be spent on producing/providing necessities in an economy if all necessities were produced/provided domestically (without imports). Assuming that we have a clear definition/understanding of what "necessary" means: how would one go about doing so?

My own idea is to use Leontief input-output impact analysis where I first create the Leontief matrix L, check the economic output from the country producing all of its imports domestically x_own_produce, and then calculating x_need by changing the final demand according to the understanding of "necessary". At some point one would also need converting factors to translate from monetary value produced in each industry into labor time (e.g. every dollar of output from a given industry requires 0.5 hour of labor). The way I would change final demand would be to provide the population with a living-wage-budget that they could spend on industries that are considered necessary.

Questions:

  1. Open question: how would you best make such an estimate?

  2. Is my idea a good way to make the estimate? If no: why not?

  3. If my own idea seems legitimate to you: What data would you use? The best data I've found is IO tables from the OECD, but they have relatively few sector categories which worsen the estimate of necessary industries (for example bundling together the production of food products, beverages, and tobacco, where I would consider only the first to be necessary).

  4. In calculating x_own_produce from OECD IO tables would it be correct to do so by setting the import column IMPO: Imports (cross border) to zero for all rows (sectors)?

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  1. Open question: how would you best make such an estimate?

Normally, if you would not care about closing the economy, such estimate would be simply done by calculation of real wages per hour and then based on prevailing prices of the necessities you could calculate how many hours would average worker need to work to afford them.

However, the fact that you want to do this for closed economy complicates everything because:

A) Real wage depends on whether economy is open or not.

B) Prices depend on whether economy is open or not.

There are trade models that can help you estimate what prices and wages would be in autarky. For example, you could create some Heckscher-Ohlin or Ricardian model which would be parametrized based on some auxiliary estimates of productivity of various factors at home and abroad (which will have to be done separately) and then simulate what would happen to prices and output based on parameters of the model (and by extension factor returns (e.g. wages)).

For review of literature on how to estimate factor productivities see (Van Beveren, 2012). Alternatively, you could just do a literature review on countries you are interested in and make separate simulations for range of possible parameters that the model could have (there will always be some theoretical and also empirical estimates that can quite narrow the range of what parameters in the model can be). For tutorial on how to do numerical simulations of trade model that can then help you determine autarky outcomes you can see this excellent tutorial for GAMS (program specifically built for trade simulations). Even if the tutorial is written for GAMS you can easily use most of what is written there in Python or R.

I can't recommend a specific way of doing the numerical simulation that would be the best because that is very case dependent and this is simply too broad question to go and cover advantages and disadvantages of all possible models you could use here.

  1. Is my idea a good way to make the estimate? If no: why not?

No the idea is not good because of what was mentioned in answer to previous question. Trade generally allows country to consume outside its production possibility frontier (PPF) in autarky and it changes wages and prices.

Generally speaking, countries trade goods that can be produced more efficiently abroad (see Krugman et al. International Economics: Theory and Policy, 11th Edition). This in turn makes prices of those goods lower than they would be absent trade, and in addition it allows country to specialize in what it can do best leading to higher output and consequently real incomes. Of course, there is more nuance to it and trade can also depress wages in some sectors, but the point is that ignoring this would give you wrong and inaccurate results either way.

In your example you are trying to calculate what would happen in autarky using data on prices and wages that exist for open economy, and assuming they would still hold in closed one. This is very unrealistic and will give you wrong results - especially if the economy is small open economy such as let's say Netherlands or South Korea. For very closed economy with minimum amount of international trade such as North Korea (which only has some limited trade with China) it would not matter but I cannot think of any other economy that would not be significantly engaged in international trade. It would be less of an issue for big open economies such as US but only slightly less so.

Given the above the questions in 3 and 4 are moot questions.

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  • $\begingroup$ A thorough and understandable breakdown of my problem. I would grant you many more internet points if I could! Much obliged sir (or madam) 1muflon1 =) $\endgroup$ Nov 17 '20 at 11:03
  • $\begingroup$ @thecpaptain thank you for the praise but I feel it is underserved - I suppose a more specific answer could be given to this problem. But I hope this answer at least pointed you to the right direction. Also, in this case question was a bit broad maybe in the future consider breaking question into smaller parts and posting them separately that usually yields more specific answers. Also good luck with your project. $\endgroup$
    – 1muflon1
    Nov 17 '20 at 11:07
  • $\begingroup$ My main problem is inexperience and lack of knowledge in the field of economics. Your answer made me come up with ways that would allow me to make the estimates I need in a much simpler and straight forward way. You gave me a thorough overview of the question which was precisely what I needed =). Thanks for the good luck wish, and once again: much obliged! $\endgroup$ Nov 17 '20 at 11:28

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