An interregional input–output analysis with the Eaton–Kortum model

Abstract

This study proposes a multi-regional input–output (I–O) model obtained from comparative statics analysis and a linear approximation of Eaton and Kortum's (2002). [Technology, geography, and trade. Econometrica, 70(5), 1741–1779. https://doi.org/10.1111/ecta.2002.70.issue-5] general equilibrium trade model. The derived reduced form, which represents the effect of a final demand shock, is equivalent to the Leontief inverse, which means that our model is a straightforward extension of the conventional I–O framework. In addition, supply-side shocks, such as a decrease in transport costs, and the corresponding welfare gains are also calculated without setting any structural parameters. The linear reduced forms also enable us to decompose the welfare gains into various ripple channels, such as by sector, region, or the time that the gain arrives. A Japanese multi-regional I–O table is used as a numerical example to derive the effect of a reduction in transport costs (for the links around the northern region). The results indicate that more than half of the welfare gains in the southwest region are delivered through indirect channels, and their time to arrival is more than twice of that in the northern region, which is close to the shock.