Learning Outcome:

At the end of this lesson, you will be able to identify production data in the SAM and explain the intermediate and factor inputs, and taxes/subsidies for each production activity. 

Before studying producers' decision making in a CGE model, let's explore the production data in the SAM. Table 1 shows a subset of data from the US333 SAM. The table includes the column account for each of the three production activities, and only the rows that are relevant for our study of production.

The activity columns report all the inputs that are needed to produce the three final products - agriculture (a-AGR), manufacturing (a-MFG) and services (a-SER).  Moving down the activity columns, producers purchase commodities to use as intermediate inputs.  These purchases are reported in the commodity rows (c-AGR, c-MFG, c-SER). For example, U.S. manufacturers require a total of $4,352 billion worth of intermediate inputs in their production process. The inputs are composed of AGR ($180 billion) MFG ($2,817) and SER ($1,355) commodities. 

Production activities also hire the factors, reported in the land, labor and capital rows, that are necessary to transform these inputs into final products. MFG producers spend $2,010 billion on wages and rents for the labor and capital that are combined with intermediate inputs to produce MFG products.

Producers pay taxes on their use of factors (TF-factor), such as the US social security tax for labor. MFG pays $205 billion in taxes for its use of labor. Producers also pay production, or output, taxes (ACTTAX) or, if the tax payment is negative, they receive production subsidies. In total, the MFG activity pays $296 billion in taxes. 

Table 1. Activity demands for inputs in US333 SAM

Large type version of table available HERE.

Value Added and Gross Output

Two concepts that can be illustrated by viewing the activity columns are:  value added and gross output. Value added is the sum of factor payments plus the sum of taxes/subsidies. In manufacturing, for example, value added is:

Payments to Labor and Capital + Taxes = Value Added

Gross output is the total expenditure on inputs and taxes/subsidies. It includes the costs of intermediate inputs plus value added. In manufacturing, gross output is:

Intermediate inputs + Value added = Gross Output

$4,352 + $2,306 = $6,657 (with rounding)

Breaking the Production Decision into Parts

The separation of total input costs into intermediates and value added expenditures is an important concept to understand because most standard CGE models separate producer decision-making into two or more parts. One part is the decision about the quantity of intermediate inputs to purchase. This is described by an equation called the intermediate input production function. The second decision is the quantity of each factor to hire. This is described by an equation called the value-added production function.

Inter-Industry Linkages and General Equilibrium 

The production data also introduce you to a general equilibrium linkage. The 3x3 matrix formed by the activity columns and commodity rows in Table 1, is called the input-output matrix (Table 2). It describes the linkages among activities as they supply and use each others' products as intermediate inputs. These inter-industry linkages convey shocks in one industry to others, through changes in supply and demand in the intermediate input market.

Table 2.  Input-Output Matrix in US333 SAM

Upstream activities are those that supply other downstream activities with commodities used as intermediate inputs. A change in the price or quantity of intermediate inputs available from an upstream supplier will affect downstream activities that rely on those inputs.  And, a change in downstream activities' demand for intermediate inputs will affect the upstream producers.

For example, AGR is the upstream activity that helps meet the demand by MFG for $180 billion worth of intermediate AGR inputs (some of the AGR inputs are supplied from imports).  MFG is the downstream activity that purchases $180 billion worth of AGR inputs. 

Based on the input-output relationships shown in Table 2, which activity would be affected most if the supply of SER inputs were to fall dramatically?