On the Plausibility of the Supply‐driven Input‐output Model

ABSTRACT The supply‐driven input‐output model is, in all its aspects, the complete reverse of the traditional, demand‐driven input‐output model. Several authors have used it to indicate the strength of the industrial forward linkages in the economy at hand. Others have used it to indicate the impact of specific supply shortages on output levels. Finally, it has been used as a general description and projection vehicle for entire economies that are thought of as being supply‐constrained, such as centrally planned economies. This paper critically reviews this literature and concludes that most of these applications suffer from more or less severe theoretical flaws. It is argued that using the supply‐driven model as a descriptive device to indicate the strength of forward linkages is justified. In the case of impact studies, straightforward use of the model is criticized and a more careful estimation procedure is suggested. For the purpose of a general description of a supply‐driven economy, a dynamic optimization model is proposed to replace the theoretically implausible, supply‐driven input‐output model.