INTRODUCTION
Every Industry needs to purchase goods and services (Commodities) from other Industries (and even from itself!) to operate their business. Formerly known in IMPLAN as Intermediate Expenditures, Intermediate Inputs (as defined by the Bureau of Economic Analysis (BEA)) are “goods and services that are used in the production process of other goods and services and are not sold in final-demand markets.”
Intermediate Inputs are purchases of non-durable goods and services such as energy, materials, and purchased services that are used for the production of other goods and services, rather than for final consumption. They do not include any capital-account purchases or labor. These purchases reflect the backward linkages of an Industry to other Industries from which it purchases inputs to produce its output. Not all Intermediate Input purchases can be fulfilled locally.
IMPLAN has developed regionalized Intermediate Input spending patterns by taking national-level spending patterns and combining them with regional Industry-level data and Trade flow data. These regionalized Intermediate Input spending patterns reflect the Industry demand that is sourced locally. By capturing Industry spending on Intermediate Inputs locally, IMPLAN is able to calculate the Indirect Effects of business-to-business purchases.
This article describes Intermediate Inputs within the context of the Leontief Production Function (LPF), defines key terms related to Intermediate Inputs, briefly discusses the data sources, and highlights how Intermediate Inputs are incorporated in Economic Impact Analysis.
A COMPONENT OF THE PRODUCTION FUNCTION
The production function of an Industry in IMPLAN determines how an Industry will allocate Output to continue to operate. To complete each Industry’s production function, the Industry needs Intermediate Inputs and additional factors called Value Added. The combination of a Industry’s spending on Value Added and Intermediate Inputs equals the Industry’s Total Output.
The share of Output going to purchase Intermediate Inputs differs from Industry to Industry. For example, goods-producing Industries have a higher proportion of Output going to Intermediate Inputs than Service Industries. This is because they need to purchase more inputs to production than labor.
HOW IS IT CALCULATED?
IMPLAN defines Intermediate Inputs as:
Or more simply,
So to calculate Intermediate Inputs, we just take Output less the other four components of the Leontief Production Function (which sum to Valued Added).
KEY TERMS
GROSS INPUTS
The total dollar amount spent on a given Commodity by an Industry is known as Gross Input. Total Gross Inputs, therefore, represent the total dollar value of all Intermediate Inputs purchased by the Industry.
This data can also be described using Gross Absorption Coefficients which represent the percentage of each Industry’s Output that is spent on each given Commodity (good or service) as part of its annual operations.
REGIONAL INPUTS
Intermediate Inputs cannot all be sourced from within the region; some Intermediate Input purchases are imported from other regions (as captured by the Regional Purchase Coefficient (RPC)). The total dollar amount spent locally on a given Commodity is known as Regional Input and is equal to the Gross Input multiplied by the RPC.
Regional Absorption Coefficients reflect the percentage of each Industry’s Output that is spent on each given Commodity purchased locally. Regional Absorption Coefficients are calculated as Gross Absorption multiplied by the RPC.
MEASURING INTERMEDIATE INPUTS
With a few exceptions, the Bureau of Economic Analysis’ (BEA) Benchmark I-O Tables (which are released every five years) are the primary source for IMPLAN’s Industry Scheme and Intermediate Input data. These are national-level data that provide information about the Intermediate Inputs that are required by each Industry to produce their Output.
IMPLAN combines this data with regional Industry-level data and trade flow data to develop regionalized Intermediate Input Spending Patterns. This means that the Gross Absorption Coefficient values for all regions change from year to year, reflecting new regional Industry Output and Value Added (VA) totals and new Commodity supply, demand, and Trade values each year. Furthermore, Gross Absorption Coefficients for a particular Industry will also vary across regions because the ratio of VA to Output varies from region to region. The assumption is that the regional Output and VA data are correct, and the national coefficients need to adjust to fit the local situation.
For more information about how Intermediate Input demand is regionalized read Intermediate Input Data.
INTERMEDIATE INPUTS IN ECONOMIC IMPACT ANALYSIS
Each Industry purchases Commodities from Industries to operate their business, which generates the initial round of backward linkages for each Industry.
The first round of Indirect Effects are triggered by the Intermediate Inputs purchased by the Direct business or businesses when analyzing Industry Events, Commodity Events, Industry Contribution Events, and Institutional Spending Pattern Events. The amount of Intermediate Inputs is solely determined by the Event’s Direct Output and the relationship between Output and Intermediate Inputs according to the Direct Industry’s Total Gross Absorption. Further rounds of Indirect Effects reflect the ripple effect through the local Supply Chain. The local businesses affected in the first round of Indirect Effects also purchase Intermediate Inputs from local businesses, and so on.
Labor Income and Household Income Events do not generate any Indirect Effects, but there are Intermediate Inputs still being analyzed in them. In these Events the income spent at local businesses is being estimated and analyzed. The Intermediate Inputs of the Inducedly affected business triggers further rounds of Induced Effects.
When using an Industry Spending Pattern Event, the first round of Indirect Effects are triggered by the Intermediate Inputs being analyzed. The amount of Intermediate Inputs is solely determined either by the Event Value alone (by default Industry Spending Pattern Event Values are total Intermediate Inputs) or by the relationship between Output and Intermediate Inputs according to the specified Industry’s Total Gross Absorption when “Total Output” is selected in the Advanced Menu of the Event instead of Intermediate Inputs.
Industry Spending Pattern Events are appropriate when modifications to the Intermediate Inputs of an Industry’s Leontief Production Function are necessary. When detailed information is known about Intermediate Input spending, these Events can be used and adjusted to reflect the specific purchases or ratios of purchases. Industry Spending Patterns include all Intermediate Inputs for a given Industry.
Institutional Spending Patterns are unique in that they describe both Intermediate Inputs and Value Added within the same Spending Pattern. The results in Institutional Spending Pattern Events differ: the reported Direct Effects describe both what we would generally consider Direct Effects (income, Employment, and Value Added) and the first-round Indirect Effects that arise from the government spending its budget. To learn more about reclassifying these results, see Categorizing Effects for Institutional Spending Pattern Events.
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Categorizing Effects for Institutional Spending Pattern Events
Written February 26, 2020
Updated July 29, 2024