THE ROLE OF INTERINDUSTRY STUDIES IN ECONOMIC INTELLIGENCE ORR PROJECT 13.4 29 JANUARY 1954

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79S01046A000100030007-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 40
• Document Creation Date: November 9, 2016
• Document Release Date: September 8, 1998
• Sequence Number: 7
• Publication Date: January 29, 1954
• Content Type: REPORT

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RESEARCH AID
THE ROLE OF MTERINDUSTRY STUDIES
IN ECONOMIC INTELLIGENCE
.RR PROJECT 13.4
29 January 1954
CENTRAL INTELLIGENCE AGENCY
OFFICE CF RESEARCH AND REPORTS
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'iVARNING
This material contains information affecting
the National DE fense a the United States
within the meaning of the espionage laws,
Title 18, UST, S3CS. 7E3 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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CONFIDENTIAL
RESEARCH AID
THE ROLE OF INTERINDUSTRY STUDIES IN ECONOMIC INTELLIGENCE
ORR Project 13.4
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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FOREWORD
The purpose of this report is to outline as briefly and as
clearly as possible the techniques, data problems, uses, and
limitations of interindustry economics as they are related to
economic intelligence. For purposes of brevity and clarity, the
issues are treated in a highly simplified and somewhat repetitive
manner.
Interindustry economics, or, as it has sometimes been called,
input-output analysis, is an organizational framework and tool of
analysis for studying an economic system quantitatively, rigorously,
and systematically. The techniques permit analysis of the econon,y
as a whole and of individual products and industries simultaneouely.
During the past 2 years the US intelligence community has done
exploratory research in the interindustry field. This report is
an examination of the role which interindustry studies can play in
economic intelligence. An attempt is made to state the limitations
as well as to describe the applications of interindudtry analysis
in economic intelligence, but only insofar as this may be done with-
out attempting to answer questions relating to the objectives,
techniques, and limitations of economic intelligence in general.
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Summary and Conclusions
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CONTENTS
Page
1
I. Interindustry Economics 2
A. Conceptqal Framework 2
B. Data 7
C. Uses 9
D. Limitations 9
E. Evaluation 11
II. Economic Intelligence and Interindustry Studies 11
A. Nature of Intelligence Data 11
B. Direct Use of Data 13
C. Analytical Uses 13
1. Analysis of Parametric Changes 13
a. Final Demand
b. Interdiction 15
c. Structural Change 16
2. Ancillary Analytical Uses 17
D. Organizational Uses 18
Appendixes
Appendix A. US Interindustry Tabulations 21
Appendix B. Development of Structural Analysis in Economic
Intelligence 23
Appendix C. Methods and Procedures in the Construction of
Soviet Interindustry Tabulations 25
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Page
Appendix D. Bibliography 31
Tables
1.
Interindustry Flow of Goods and Services by Industry
Following Page
of Origin and Destination, 1947
22
2.
Direct Purchases per Dollar of Output, 1947 . ?
?
22
3.
Direct and Indirect Requirements per Dollar of Final
Demand, 1947
22
NOTE ON CLASSIFICATION
The over-all classification of this report
. is CONFIDENTIAL. However, Appendix A, in-
cluding the tables, is UNCLASSIFIED and is
so designated.
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ORR Project 13.4 CONFIDENTIAL
THE ROLE OF INTERINDUSTRY STUDIES IN ECONOMIC INTELLIGENCE
Summary and Conclusions
Interindustry studies represent an approach to the description
and analysis of an entire economic system. Questions relating to an
economy as a whole are important in economic intelligence in estimating
the economic capabilities, vulnerabilities, and intentions of foreign
powers. The basis of interindustry studies is research on the inputs
and allocations (purchases and sales) of all sectors of an economy.
This research results in a quantitative description of the economy in
the form of tabulations showing the allocation of each producing Eector
to each consuming sector (or the inputs into each consuming sector
from each producing sector). The general uses of such tabulated data
in economic intelligence are three: (1) direct uses in the study of
products and product groups; (2) analytical uses in evaluating ecc-
nomic capabilities, vulnerabilities, and intentions; and (3) organi-
zational uses in research management.
Interindustry research must necessarily be regarded as long-run
cumulative research. The requirements for data are large. In many
cases intelligence sources cannot provide much of the information
needed. Only a slow and painstaking process of continuous research can
fill the gaps. In the short run, interindustry studies contribute
mainly a system or framework in which many types of quantitative eco-
nomic information can be related to one another. In the long run, as
the data improve and accumulate, it will be possible to undertake Lila
solution of complicated problems, as, for example, to estimate the
economic consequences of given sets of wartime demands on an econany.
Although interindustry analysis is theoretically capable of handling
a problem of this kind on a level of detail not attainable by other
methods, it remains only one of several techniques of analysis available
in economic intelligence. For the description and analysis of an con-
omy as a whole, it supplements but does not replace the use of indi-
cators, of such aggregates as gross national product and production
indexes, and of material balances systems.
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I. Interindustry Economics.
A. Conceptual Framework.
The beginning of analysis with interindustry techniques is a
detailed description of the economic system for an annual period. The
goods and services produced in the economy are aggregated into sectors.
The description indicates the transactions (purchases and sales) among
these sectors. Any given sector is described both in terms of its
purchases from each of the other sectors -- the input, or cost, struc-
ture -- and its sales to each of the other sectors -- the use, or
consumption, pattern. For the whole economy, all the transactions
which took place in the given year are shown in a double-entry account-
ing tabulation organized so that along the rows the use patterns of
the sectors are arrayed and in the columns the input structures of the
sectors are listed. The interindustry tabulation is the basic infor-
mation with which analysis is performed.
Analysis can be conducted either by regarding the economy as
a closed circular system in which the output of all sectors is consumed
by other sectors or by distinguishing between two types of sectors in
order to determine the impact of changes in one group of sectors on the
other sectors and on total output. The open interindustry system has
been the most useful both because the assumptions it is necessary to
make more nearly approach the facts than is the case with the closed
system and because open interindustry system analysis offers the pos-
sibility of examining a wide range of problems concerning changes in
demand and technical structure.
The open interindustry system distinguishes between interindus-
try sectors and final demand sectors. The interindustry sectors are
engaged primarily in buying from other sectors and selling to other
sectors. The food-processing, chemicals, and transportation sectors
are examples. These sectors buy raw materials, electric power, fuel,
and other inputs and in turn sell their output to many other industries
and to households. The final demand sectors consume the output of
other sectors but do not produce a processed output which is sold to
any other sector. Sectors usually considered to be final demand sectors
are household consumption, foreign trade, government (including mili-
tary) expenditures, and capital formation.
The amount of research effort, the quality and quantity of data,
the objective of research, and the technological and decision-making
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processes of the sectors condition the decision to place a sector in
final demand. For the interindustry sectors, rigorous analysis assumes
fixed technical interrelationships between inputs and outputs. The
fact that such assumptions are not made for final demand sectors, in
which constancy of technical interrelationships is seldom character-
istic, implies that an open interindustry system is most suitable
for analytical purposes.
The breakdon of transactions within the economy and the nature
of the interrelationships may be of varying degrees of complexity.
The three major transactions categories are (1) current account, (2)
capital account, and (3) interregional transactions. Technical inter-
relationships are frequently assumed to be constant. If data are
available, however, linear, discontinuous, or curvilinear functions
can be used.
Any given transaction between one sector and another may be
divided into its components and tabulated along with the total. A
purchase designed to meet the current operating needs of the buyer
is usually the largest proportion of the total purchase by a sector.
In much of interindustry analysis this transaction is the only one
taken into account as a part of the interindustry system. Another
segment of a purchase by a sector is that which is on capital ac-
count -- purchases designed to add to capacity or to increase inventory.
When analysis is performed using the relatively simple current trans-
action interindustry system, capital transactions for all sectors are
aggregated into separate capital formation and inventory sectors, which
are usually placed in final demand. When capital transactions are
Identified for each purchaser from each seller, then a double inter-
industry system results. The double system is called the dynamic
interindustry system.
Another breakdown of transactions is to specify the region
originating and the region receiving for every purchase and sale.
Such an interregional interindustry system amounts to splitting the
national interindustry tabulations into regional components and :Indi-
cating not only the interindustry transactions but also the interspatiaa
transactions.
The more complicated the interindustry systems become, the
more rigorous become the assumptions which it is necessary to make to
perform analysis. In the simple current transactions system it fs
usually assumed only that the relationships between inputs and outputs
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for all interindustry sectors are known technical functions. With a
dynamic system it is assumed, in addition, that the relationships be-
tween capital inputs and outputs at capacity are known technical func-
tions. An interregional system involves the assumption that there is a
known technical relationship between inputs and outputs region by region.
The technical interrelationships are usually assumed to be
fixed and constant. It is not analytically or computationally neces-
sary that technical coefficients be constant. The functions may be
linear, discontinuous, or curvilinear. The use of such functions,
however, implies that data exist to support the described relationship.
It is seldom that such data are available. Most analysis, therefore,
has been driven back upon the constant coefficient assumption.
Despite the possibility of undertaking quite intricate analysis
with dynamic and interregional systems and notwithstanding the analyt-
ical feasibility of flexible assumptions about technical interrelation-
ships, the work which has been done in interindustry analysis has in
fact been largely confined to the more simple current transactions
system, in which the final demand sectors correspond roughly to gross
national product, which includes household consumption, government
expenditures, and capital formation.*
The type of analysis which can be performed with an open inter-
industry system is called the analysis of parametric change. Parameter
is a mathematical term denoting in this case a set of values derived
from a hypothetical situation. It is the purpose of analysis with an
open interindustry system to trace through the economy the consequences
corresponding to a given set of values. The parameters in interindustry
analysis are (1) sales to final demand and (2) interrelationships among
interindustry sectors embodied in the description of the structure of
the economy. Changes in these elements have economic impact far beyond
the immediate change.
The interdependence of modern economies, as depicted in inter-
industry tabulations, is such that any change in the structure or in
final demand initiates a complicated round of indirect effects. Inter-
industry technique is oriented toward determining quantitatively the
magnitude of indirect effects on the output of all sectors.
An increase of $1 million in final demand for aluminum products,
for instance, results in an increased demand for all inputs feeding into
* Appendix A contains a complete set of US interindustry tabulations
and an explanation of their meaning.
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that sector. Aside from labor and taxes, which are charges agaimt
final demand, these inputs are bauxite, alumina, electric power,
chemicals, metals, and transportation. Since demand for aluminum is
up, the supply sectors must expand operations and hence demand more
inputs from their suppliers, and so on. These reciprocal and indirect
effects are frequently small after the first round, but the cumulation
of the second, third, and fourth rounds, and so on, amounts to a
significant proportion of the total indirect effects. From an initial
increase in final demand of $1 million worth of aluminum products
there results an industrial expansion of $2.5 million, or indirec-,,
effects of $1.5 million. The total expansion is divided as follows:
Impact of $1 Million Worth of Aluminum Product Deliveries
to Final Demand
Thousand Dollars
Steel Works and Rolling Mills
10
Primary Metals, n.e.c.
16
Copper Rolling and Drawing
20
Nonferrous Metal Rolling, n.e.c.
22
Primary Copper
25
Metal Mining
27
Coal and Coke
30
Wholesale Trade
37
Railroads
39
Primary Lead and Zinc
43
Petroleum Products and Crude Petroleum
47
Electric Light and Power
64
Industrial. Chemicals
111
Secondary Nonferrous Metals
252
Primary Aluminum
479
Aluminum Rolling and Drawing
1,097
Other
181
Like changes in final demand, changes in technical relation-
ships start a round of indirect effects, resulting in a different
level of output for all sectors. A comparison of sector output under
the two situations indicates what effect the structural change has had.
It also is possible to interpose side conditions and determine
the consequences of the economy's operations under these conditions.
Assume that the outputs of all sectors have been computed under given
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conditions. Then it may be postulated that a given sector's output
is a specific amount. With the new schedule of outputs, the same
as before except for the one sector, a new final demand may be deter-
mined. In addition, different magnitudes and mixes for final demand
may be postulated, all consistent with a specific output for the
given sector but with other sector outputs free to change.
Within the framework of analysis of parametric change (and side
conditions), it is possible to deal not only with the structure on cur-
rent account but also on capital account and to take into consideration
other more complicated phenamena. To do so multiplies the data require-
ments, requires new assumptions, and introduces time explicitly into
the analysis. While more complex in data, analysis, and interpretation,
the results are in finer detail and are more precise and reveal aspects
not discernible in simpler analysis.
Underlying all the analysis, indeed all analysis, is a logical
system. In interindustry anRlysis the logical system can be framed
in mathematical terms. The mechanism of analysis follows this mathe-
matical structure closely. The precise form of analytical process is
not uniform, and there is no "grand solution" which solves all prob-
lems. It is true that when the assumptions are decided upon, when all
the data are in, and when no changes are foreseen, the data can be
manipulated mathematically and the solution to the system (or systems)
of equations implied by the interindustry structure can be obtained.
This is a particularly costly procedure, and it freezes the data,
classification system, and assumptions, so that even a snail change
involves a repetition of the expensive solution. The usual process
makes possible more flexibility in data changes (including estimates
of temporal and scale changes in structure) and in the application of
limiting assumptions, and it allows for detailed exRnination of specif-
ic groups of sectors without much attention to other sectors. The
process is called iteration, but the procedure cannot be spelled out
in detail, since it changes from problem to problem. In general,
iteration involves tracing a given impact through the economy by
hand rather than mechanically, starting with the initial change in
a sector's output, determining its impact on the sector's suppliers,
then the impact on the sectors supplying these suppliers and the
sectors supplying the second-round suppliers until the indirect effects
are negligible.
It must be remembered that the technique is not in itself
a predictive device. The predictive element enters through the
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parametric changes or side conditions which are imposed on the economy.
The analysis performs the function of taking these predictions and
converting them into predictions of a different type. It is a
vehicle for completing conditional statements of the form: "If Y.,
then Y." The "X" is a prediction about a change in final demand, a
structural change, on a side condition. "Then" is the analyticaj
framework by which it is possible to derive conclusion 'Y?" which is
also a prediction. "Y" is a schedule of sector outputs, to be com-
pared with previous,outputs determined before "X" was specified. The
technique simply carries the prediction along and reveals implications
that are not clearly obvious. Since the analysis embodies information
about the economy, it influences the derived prediction "Y." In any
event, however, if "X" is an inaccurate forecast, then "Y" will in-
evitably be wrong.
B. Data.
Grist for the interindustry analysis mill is information as
to (1) the magnitude of transactions (purchases or sales) among the
sectors of the economy and (2) the technical interrelationships
(input coefficients) among the sectors of the economy. Transactions
data can be viewed as coming from two sets of books. One set of books
records all of tAe purchases of each sector from each of the other
sectors.. The other set of books indicates all of the sales of each
sector to each other sector. The two sets duplicate each other. A
complete record of sales is also a complete record of purchases.
The technical data, showing intersector relationships, consist or
scattered information derived from engineering analysis. In practice,
however, sectors of the economy do not keep books, data are scarce,
and the information needed for interindustry analysis is limited and
difficult to obtain.
Generally, there are three sources which form the empirical
basis for interindustry analysis: (1) statistical records, (2)
engineering and technical data, and (3) information derived from sam-
ples.
Statistical record information is the most important. Ir, the
UB and many other countries, such data are based ultimately upon
records kept by individual firms. The data are compiled and made
available through census and survey reports (Census of Manufactures,
Minerals Yearbook, and others in the US), publications of trade end
industrial associations, and directly from the production and account-
ing statements of the firm.
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Engineering and technical data are available in many published
engineering analyses to be found in textbooks, manuals, and specialized
periodicals. It is possible in many cases to undertake research in-
vestigations making use of engineering methods to develop information
on industrial interrelationships.
Techniques of Sampling make it possible, by interviews and
questionnaires, to obtain information about the whole from limited data
about its parts. Samples of recorded information, where the whole body
of data is large, have also proved useful.
The three principal empirical sources provide the underlying
data required to piece together a complete quantitative description
of the structure of the economy. The sources of data are not inde-
pendent, and none by itself is adequate. They combine to form the
description of economic structure on which subsequent analysis is
based.
The data required for interindustry studies are more detailed
than the data needed for most economic analysis. The minute detail
of data for interindustry purposes gives rise to a greater chance for
error. Much economic analysis makes use of more highly aggregated
data, in which small errors are canceled out, whereas in interindustry
analysis every error is fully reflected in the results. In other
economic analysis, greater reliability also can be achieved because
more attention can be given to each part of aggregated data.
The data used in interindustry work have not been notably
accurate. Census information, sampling, and some engineering coeffi-
cients have gone into the construction of existing interindustry
tabulations. Despite the fact that a great amount of data has been
accirrmilated and that zompetent analysts have been working with the data
over a period of years, there is still much to be desired. Weaknesses
In data and lack of data have been the major stumbling blocks to
successful analysis.
One of the most important analytical uses of interindustry
studies is as a study of the implications of changes in external demands
on the economy. These changes are based ultimately on peace or war
strategy !gra tactics, technological innovations, weapons systems and
defense measures, and decisions of investors and consumers. These
considerations must be reduced to quantitative economic terms which
are consistent with the description of economic and industrial
structure. The data involved in hypothetical changes are no less
important than the data on economic structure, although the former
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are frequently neglected. Estimates and, often, guesses substitute
for a careful derivation of the economic quantities implied in a
change in strategy. If the data specifying the change are not accurate.
the conclusions will be amiss.
C. Uses.
The uses of interindustry analysis have already been implied
in the types of analysis which can be undertaken. The great single
analytical use is the determination of indirect effects of a charge
in final demand, sector output, or the structure of the economy, or
in some combination of these. A knowledge of these facts is useful
not only in itself but also as an aid in the analysis of the operation
of the economy.
Several broad classes of uses may be enumerated: (1) national
security, (2) national welfare, (3) technological innovation, (4)
market and sales research, and (5) economic intelligence. In of
the uses, variations and combinations of types of analysis can be used.
In addition to the analytical uses mentioned above, interindus-
try studies provide a valuable consistency check and confirmation for
estimates derived from national accounts (such as industrial production
indexes and gross national product) and are a starting point for anal-
ysis along other lines or of separate sectors. These auxiliary ana-
lytical uses are in some cases as valuable as the analysis of parametric
change. For instance, analysis of the relationship between the con-
struction industry and other industries in the US has revealed serious
errors in data on construction activity.
The organizational system implied in interindustry analyris
is one of its most significant contributions. The use of a detailed
coded classification system in which each sector is rigorously defined
makes it possible to organize the data, documentation, and methods
of estimation in an orderly manner and provides a means both for con-
tinual accretion to data and for checking their consistency on a
continuing basis.
D. Limitations.
The limitations of any technique of analysis result from (1)
failure of assumptions to approximate actual conditions, (2) inade-
quate or improper formulation of the hypothesis, (3) weakness in and
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lack of data, (4) errors in inference, and (5) inaccurate and inade-
quate interpretation of the results.
Economic analysis has advanced to the point where logical flaws
in inference are rare. The basic formulation of the hypothesis in
interindustry analysis is sound. Granting its assumptions, interindus-
try analysis has been demonstrated to be logically accurate. Even so,
however, it can be misused, and care must be exercised to see that the
formulation is correct and the inferences are carefully. drawn.
The other limitations, those arising from assumptions, data,
and interpretation, impose a heavy obligation on those undertaking
the analysis. The limitations are such that no precise statement can
be made as to the magnitude of error introduced by any of them sepa-
rately or by the three combined. Generalization as to direction and
magnitude of error cannot be made. If a datum is wrong, it is reflect-
ed in the results. If an assumption is inaccurate, the conclusions
will be biased. If an interpretation is not appropriate, the purpose
of the analysis is defeated. Precisely the same conditions obtain for
any other form of analysis. If there is a difference between inter-
industry and any other kind of analysis in this respect, it results
from the facts (1) that the assumptions are more specific and compre-
hensive, (2) that more detailed data are involved, and (3) that inter-
pretation is more complex. Each of these may allow error to intrude.
Two particular considerations are especially troublesome. One
is the frequent assumption that the input per unit output is fixed for
all ranges of output. The other is the possibility that the errors in
data are so large that they are as large as, or larger than, the in-
direct effects which are the major reason for undertaking the analysis
in the first place. These limitations cannot be dismissed and must be
constantly kept in mind. Extreme care must be maintained to see that
the limiting assumptions, especially those involving fixed coefficients,
are handled so that conclusions are not impaired. The process of iter-
ation mitigates in some degree the fixed coefficient assumptions, since
by means of this process the coefficients may be changed to reflect
temporal, scalar, and structural changes. Even so, analysis necessar-
ily proceeds on the basis of assumed technological rigidities which
are frequently at odds with actual events, and the limitation must
always be considered. Data weaknesses are often so great that one
has no confidence that, a particular indirect effect may be twice as
much or only half that, resulting from analysis. The errors may be
greater than the indirect effects. The hazard is increased by the
fact that it is not possible to determine where weaknesses in data
have vitiated the results. The data are intermingled to such an ex-
tent that it is almost, impossible to untangle them and find where a
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poor datum has influenced the results adversely. Nothing can substi-
tute for data. Where data are weak or are lacking, the results of any
analysis based upon them are correspondingly weakened. There are no
"tricks" to get around this limitation. Only data improvement through
arduous and assiduous research can raise the level of analysis.
E. Evaluation.
It is still t90 early to offer a definitive evaluation of
interindustry techniques. No one questions that interindustry analy-
sis has some capabilities not possessed by other forms of analys-is;
that it is a flexible and powerful tool of economic analysis, and that,
used judiciously, it is a valuable analytic framework for many quan-
titative economic problems. So far, however, interindustry analysis
cannot be said to have been tested and proved as an accurate predic-
tive device in the comprehensive detail which it implies.
In a literal sense, interindustry analysis cannot be "tested."
It can be compared, and its consistency can be checked internally.
Prediction resulting from analysis can be compared with realized re-
sults, but this operation tests the techniques only in part, since
the real predictive element is apart -- that is, independent of he
analytical technique.
The basis for judgment of analytical results is the corres-
pondence of the data with the facts and the correspondence of the
assumptions with the operational procedures. When these conditions
hold, analytical results can be counted upon as reliable. "Good"
and "bad" are misnomers when applied to internally consistent theo-
retical frameworks. Such frameworks may be useful or not useful for
purposes of solving particular research problems. A tentative favor-
able evaluation can be given interindustry analysis.
II. Economic Intelligence and Interindustry Studies.*
A. Nature of Intelligence Data.
Economic intelligence data having a bearing on the operamions
of the economy of foreign powers are of three general kinds: direct
intelligence, derived intelligence, and analogous data.
Direct economic intelligence data are relatively scarce. Two
kinds of direct intelligence are available. The first consists of
official statements and the second is classified information obtained
* Appendix B outlines some of the work which has been done along
interindustry lines in the intelligence community.
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from Observation, documents, and other sources. Both of these kinds
of data are spotty and inadequate. In addition, the data are of
uneven quality and reliability.
Derived intelligence is that information which can be inferred
from what is known directly. The basis of the derivation may be the
complementarity of industrial products, technology, or many other
situations in which an unknown quantity may be deduced from known
quantities.
Analogous information is that body of data known and available
for some country other than the foreign power under study which 2an
be used to fill gaps in direct and derived intelligence. Information
concerning the US economy, because of its abundance and ease of
acquisition, has become the standard analogy.
Any research effort, including interindustry research, must
necessarily make use of all three kinds of data and data from all
sources. The combination cannot be known in advance. Ideally, direct
intelligence should be the empirical backbone of any research, with
derived intelligence providing the primary support data. Analogous
information, if used at all, should be used sparingly and only to
fill gaps which must necessarily be filled.
In interindustry research, because of the detail required,
the weighting of various kinds of data is often quite the opposite of
the ideal. In order to complete a systematic study of the economic
structure of the USSR, it is necessary to borrow extensively from US
information on technological interrelationships. Direct intelligence
and derived intelligence are important in establishing the control
totals and for some of the estimates of inputs and allocations.
At the very best the data used in interindustry research
are of questionable reliability. In some cases it is possible to
assign error limits for individual figures, such as the production. of
a single product. But when this estimate is aggregated with other
such figures having differing reliability and with some data on US
industry, it becomes difficult to assess the reliability of the final
figure.
Weaknesses in data and lack of data are the most serious prob-
lems in interindustry analysis of foreign powers. Accurate data
are mixed with the less accuraLe, and the final tabulation, because
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of aggregation and forcing to fit the control totals, has a mixed
quality without any way to identify the more from the less reliabie.
Since the technique is oriented to revealing indirect eff3cts,
the data weaknesses may result in a situation in which the error
limits are as much as, or greater than, the indicated effect. In
this case the actual indirect effect may be half or twice as much as
that indicated. There is no way out of the dilemma. The deleterious
effects of inadequate data can be mitigated in some measure._ The
only satisfactory remedy is to raise the level of confidence in tie
data by continuous research.*
B. Direct Use of Data.
Interindustry research serves several important uses in eco-
nomic intelligence. Not the least among these uses is the direct use
of the data in industry and product description. The cost structire
and use pattern of an individual product are an integral part of
interindustry analysis, and they are also of considerable intelligence
value in and of themselves. Alone or in combination with other data,
interindustry tabulations can form the frame of reference for analysis
of products, product groups, and large sectors of the economy.
Nearly all sector and product studies have as a part of
their research effort the estimate of output, of some critical inputs,
of major end uses of the item, and of possible substitutes. These
data are substantially the same as those needed in interindustry
analysis. Hence a double purpose is served in working up these data:
direct use in sector studies and use as a part of interindustry
studies.
C. Analytical Uses.
1. Analysis of Parametric Changes.
The most significant area of analysis is that of deter-
mining the implications of changes in the economy which affect th
sector outputs. A parameter is an element in the economy which is
fixed for any postulated situation but which may change as the postu-
lated situation changes. The parameters are (a) allocation of sector
outputs to final demand, (b) the input-output coefficient for partic-
ular sectors, and, in special cases, (c) the output of specific
sectors. These three elements are fixed for any given time period
* Appendix C is an outline of procedures which can be used in the
construction of interindustry tabulations for the USSR.
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under a given set of conditions. Analysis proceeds on the basis of
postulating changes in any one of them and working out the implica-
tion of these postulated changes.
a. Final Demand.
There are innumerable examples of changes in final
demand. From the point of view of economic intelligence, the most
important examples are analyses of mobilization and war demands
to determine the capability of a foreign power to support the
demands of such action. Interindustry techniques are particularly
valuable for such an evaluation, since this type of analysis is
explicitly designed to bring out the indirect requirements of a
military program and economic mobilization for war. For instance,
a direct requirement for aluminum products by the military services
might be easily within the economy's capabilities. But in order to
attain the higher level of demand, 150 percent more aluminum products
are required and other vital sectors have a heavy expansion burden
placed upon them. Levy of a complete schedule of mobilization and
war requirements resulting from the expansion of supporting sectors
of the economy may make the difference between the ability of the
economy to meet the new demands or the necessity of cutting back
important sectors.
The analysts of mobilization and war demands inserts
a new element of uncertainty. The data on direct requirements, which
become a part of final demand, and data on cutbacks and shifts in con-
sumption and investment are hypothetical. But these data must reflect
accurately the postulated conditions, or the analysis becomes a simple
exercise in logic. The demands of the war machine must be quantified
and tabulated in terms of the sectors of the economy analyzed. This
involves a conversion from specific end products, such as tanks and
aircraft, into steel and aluminum products. The consumption sector
must be analyzed to determine the extent of cutbacks which it can
endure. The composition of the investment sector will shift, and it
may be reduced. The demands of these sectors must be quantified.
When all of the. relevant data are assembled, they may be analyzed
with interindustry techniques.
The implication of the new final demands may be traced
through by the iteration process, singly and/or collectively. As a
result of the new amends, new direct plus new indirect requirements
must be met sector by sector. These new required outputs must then
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be matched with independent intelligence estimates of maximum output
and capacity of each sector. These estimates inject another element
of error which can vitiate the results of the analysis.
A single estimate for mobilization and war demands
is not sufficient. Several sets of hypothetical final demands
can be analyzed and their implications traced. Each set is pre-
sumed to represent different circumstances. In this way an array of
estimates of capabilities can be made.
The elements of strength in interindustry analysis of
mobilization and war programs lie in its ability to determine indirect
requirements for each sector of the economy, thus showing the total
impact of demand. The weakness of interindustry analysis lies primarily
in its requirements for data. The data which form the basic structure
of the economy may well be subject to considerable error. Military,
investment, and consumer demand cannot be determined accurately in
many cases. In the verification procedure, independent estimates of
capacity may be in error. Errors introduced by the data may be so
great as to undo the benefits to be derived from the calculation of
indirect effects. No precise assessment of reliability is possible;
only a gradual improvement of the data can be counted upon to tmproye
reliability and reduce uncertainty.
Within the framework of interindustry analysis it is
possible, given the data, to become much more sophisticated than is
Indicated above. For instance, a flow interindustry system can be
coupled to a consumption-investment-military final demand. Using
this basic framework, the new final demand allocations can be fed in
by quarters and direct and indirect requirements can be calculated
by quarters. Proper accounting can be made for lead times by this
process. Furthermore, by expanding the simple flow system into a
flow and capital-capacity system it is possible to bring the capital
requirements explicitly into consideration. Interregional trans-
actions can also be considered. Both require additional data and
additional assumptions. At the present time, refinement of the flow
(or current transaction) interindustry system for intelligence pur-
poses is not practicable.
b. Interdiction.
A second area of analysis is the problem of inter-
diction. The foreign trade transactions of the economy are generally
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considered a part of final demand. Elimination of imports and exports
in whole or in part constitutes interdiction; but, since they are in
final demand, the implications for the rest of the economy may be
traced out as indicated above. Another use, perhaps more important
for the intelligence community, is that of determining the effects of
air damage on the economy. An air strike would reduce capacity and ?
hence output in many sectors. By fixing the output of those sectors
which have been damaged at a specific level and treating the other
sector outputs as fixed at the same level as before the air strike,- the
deliveries to final demand can be determined. This set of deliveries
to final demand can then be matched with a aet of deliveries to final
demand required under postulated conditions. Several final demands
can be determined. The output of sectors not damaged in the strike
would readjust to the new conditions. The interdiction problem gives
rise to innumerable solutions, and no single solution has any more
merit than another, since there are many possible ways to adjust to a
reduction in output for one or more sectors.
Because of the lack of a unique solution, the inter-
pretation of results of an analysis of interdiction is especially
difficult. The limitations of data are another serious obstacle to
this type of analysis. Even so, the interdependence of the economy makes
it important that interdiction problems be analyzed by techniques in
which this characteristic is explicit. For instance, suppose damage
to the aluminum products sector reduced output by 50 percent. If the
interindustrial requirements are 50 percent or more, there will be no
deliveries to final demand unless sector outputs are reshuffled so
that aluminum-demanding interindustry sectors reduce their output and
hence their consumption of aluminum products. Only with a general
interdependence schema is it possible to determine the full impact of
interdiction.
c. Structural Change.
The third area of analysis is the consideration of
structural change. Although this problem is conceptually separate,
it is in fact usually coupled with changes in final demand and inter-
diction. The basic descriptive data -- the input per unit output for
all sectors -- are usually assumed to be fixed for analytical purposes.
The coefficients are presumed to reflect technological necessity, and
it is on this assumption that most analysis, including that discussed
above, is based. Using the iterative process, however, it is not
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necessary to adhere slavishly to this assumption. The coefficients
may be changed to reflect the changed conditions.
The analysis of structural change, whether as a
problem in itself or as a part of the analysis of war or mobilization
or interdiction, implies that there are data concerning such struc-
tural changes. In reality this is seldom the case, for most of the
structural changes are hypothetical with an empirical base limited to
analogous information about the US economic structure. Despite this,
structural change, however it arises, is of sufficient magnitude that
it must be taken into account.
The three types of analysis collectively would repre-
sent the ideal analysis of capabilities. For instance, in a hypothetical
war situation the economy must bear the demands of mobilization and com-
bat and at the same time sustain foreign trade interdiction, subs-antial
air damage, and loss (or gain) of territory. While adjusting to -,hese
severe conditions, the economy would undergo a series of structural
changes. Realistic postulates for all three circumstances and a re-
liable structure of the economy would make possible more detailed
estimates of capabilities than heretofore possible.
2. Ancillary Analytical Uses.
A number of ancillary analytical purposes can also be
served by interindustry studies. Analysis by means of national
aggregates also suffers from weak and insufficient data, and inter-
industry studies offer an independent method of building up these
national aggregates. The relationship between particular production
estimates and aggregates has been incompletely explored, and inter-
industry analysis offers some hope for the integration of indicat)rs
with aggregative analysis.
Interindustry analysis, expressed in a numeraire, is In
opportunity for a systematic study of prices and the relationship of
prices to real costs. Such cost analysis is valuable not only in
that it points to the drain of a given sector on the allocation c:P'
materials to alternative uses but also as a weightinv system for Lhe
construction of index numbers for the economy as a whole and for
various components.
No precise outline can be made of all the ancillary
analytical uses of interindustry stvidies. Many such uses are
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confirmatory in nature, and they tend to buttress analysis of different
kinds by providing both a confirmation of results and data from a new
source. Other analytical uses, such as examination of prices and
costs, break new ground. It is quite possible that the ancillary ana-
lytical uses will prove, at least in the short run, much more valuable
than the direct analytical application for which interindustry studies
are specifically designed.
D. Organizational Uses.
While the ultimate aim of interindustry studies is analysis,
there are within the process many benefits to be derived by looking
at the economy as a double entry accounting system and organizing
the data is such a manner that economic interdependence is revealed.
One of the most significant of these organizational uses is
its educational value. In a research effort organized largely along
functional lines it is all too easy to concentrate upon particular
products and industries to the relative neglect of the over-all economy.
The interindustry approach, by putting the economy and all its compo-
nents into perspective, enables one to grasp details simultaneously
with the over-all situation. At a glance the complicated industrial
interrelationships are revealed, while at the same time the over-all
functioning of the economy can be comprehended.
Since interindustry analysis depends upon a cross referencing
of costs and shipments of each sector and its components, the aproach
naturally leads to a filing system in which all of the information
about the economy can be conveniently and logically placed. The inter-
industry tabulatiOn itself is, in fact, a filing system. Behind the
tabulation lies a more complicated set of files which encompasses all
relevant data, such as prices, production (in heterogeneous units),
technical interrelationships, cost and shipment data, and other such
information.
The interindustry file is not static; it is a constantly
growing, changing compilation of data. It is arranged in such a manner
that there are continual accretions to the base fund of knowledge of
the structure of the economy. New data can be added so that they have
an immediate impact on the final tabulation; better data replace the
old, and more or less comprehensive information fits into the filing
system in such a way that the improvement in results is immediate.
This implies that no interindustry tabulation is final. For a specific
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purpose, a tabulation can be drawn out of the files, assembled,
reconciled, and used. At another time, for another purpose, another
tabulation can be developed in the same manner. Thus the interindus-
try file, a continuing and gradually improving body of data, stands
ready on short notice to support a capabilities estimate with the
latest data available.
The filing system implied in the interindustry approach makes
possible another important organizational use. This is in the test-
ing of the reliabinty of data and checking their consistency. When
the data have been assembled, it is possible to evaluate their reli-
ability by comparing them with other data. Every sale of a product
is also a cost to some sector, and every input is a part of a sector's
output. Hence the data can be checked and cross-checked. Data which
are inconsistent can be weeded out, and the general level of reliabil-
ity can be raised. New information can be compared with existing data,
and the relative merits of each can be assessed.
Finally, the interindustry approach provides a guide to further
research not only along interindustry lines but also in other methods.
Gaps in the data can be spotted readily, and steps can be taken to
remedy them. If price information for a particular group of products,
or production data for some sector, or any other information is n6eded,
the technique, backed by its organizational system, makes it possible
to detect the missing elements. It may become clear, because of weak-
ness of data, that some types of analysis cannot be undertaken but
that other kinds of analysis can be profitably expanded or that other
techniques should be exploited.
These applications of interindustry studies -- direct use of
data, analysis, and improved organization -- must be regarded as a
whole and none slighted. They complement one another. The tendency
might be to get on with the analytical uses and neglect the other
uses. This would be dangerous. The technique is one which improves
with age; the analytical stage, particularly the analysis of para-
metric change, may well be several years in the future. This is riot
only because the pilot stages of research are expensive and ineffi-
cient but also because data exploitation and preparation, both for
the interindustry and final demand sectors, are difficult and
tim-
consuming activities. To ignore the direct use of data by all re-
searchers and to neglect other analytical uses and the benefits to
be derived from improved organization would be to fail to use the
framework of interindustry techniques to its fullest extent.
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APPENDIX A
US INTERINDUSTRY TABULATIONS
Interindustry tabulations for the US economy were prepared by the
Bureau of Labor Statistics for 1947. The complete tabulation is in
terms of 450 industries. Tables 1, 2, and 3 which follow in this
appendix are an aggregation of the more extensive study.*
1. Transactions Matrix.
Table 1, Interindustry Flow of Goods and Services by Industry of
Origin and Destination, 1947, is the transactions matrix and gives
the basic transactions information. Each row shows the uses to cihich
the total output) given in the last column, was put in 1947 in terms
of the 50 consuming categories. Each column lists all of the inyuts
from the 50 producing industries into the industry listed in that
column. By definition, total costs (Total Gross Outlays) and total
sales (Total Gross Output) are the same. The classification system
splits the economy into 44 interindustry sectors and 6 final demand
sectors. The latter include new and maintenance construction,**
gross private capital formation, households, government, exports,
and inventory changes.
The transactions matrix is a description of the economy in 1947
and by itself has only descriptive uses. The use pattern of each
industry in a systematic classification system is available at a
glance. The cost structure of each industry is likewise readily seen
in the table.
* Tables 1, 2, and 3 follow p. 22. These tables are Tables 4,
5, and 6, respectively, from "The Interindustry Relations Study for
1947" by W. Duane Evans and Marvin Hoffenberg, The Review of Economics
and Statistics, Vol. XXXIV, No. 2, May 1952, following p. 142.
** New and maintenance construction actually was put in the inter-
industry group in Tables 1 and 2 (the transactions and coefficients
matrixes) but was dropped out of Table 3 (the inverse matrix), and
was regarded, for analytical purposes, as a final demand sector.
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2. Coefficients Matrix.
In order to convert the information into a form usable for analyt-
ical purposes, it is necessary to specify the relationship between
input and output for each sector of the economy. This is done in Table
2, Direct Purchases per Dollar of Output, 1947. To get to Table 2 from
Table 1, it is necessary to divide a given column by the Total Gross
Outlays (equals Total Gross Output) for the given sector. To get the
coefficients in the Nonferrous Metals sector, for example, it is nec-
essary to divide each figure in that column by $6,387,000,000. The
same operation for each column determines Table 2, which is the
coefficients matrix. In the process the final demand sectors are
dropped out, inasmuch as coefficients for these sectors are not needed.
The coefficients matrix is usable directly in the iteration
process. Successive multiplications of coefficients will determine
the first-round effects, the second-round effects, the third-round
effects, and so on, until, after innumerable such calculations, the
total indirect effects of a change can be computed.
3. Inverse Matrix.
A solution to the entire system of equations is given in Table 3,
Direct and Indirect Requirements per Dollar of Final Demand, 1947.
Both direct and indirect effects are determined simultaneously in
this table. For instance, $1 of final demand for Agriculture and
Fisheries results in a demand of $1.41 increased output of Agriculture
and Fisheries, of $0.10 for Food and Kindred Products, of $0.05 for
Chemicals, and the same for Stone, Clay, and Glass. The total impact
of the delivery of $1 worth of goods to Agriculture and Fisheries, as
can be determined by summing over the entire row, is an expansion of
all output to $1.98, nearly double the initial change. '
Many examples may be shown. For instance, the delivery. of $1
worth of Motor Vehicles to final demand requires Iron and Steel to
expand $0.24; Nonferrous Metals, $0.08; Other Fabricated Metal
Products, $0.12; and Chemicals, $0.06. The delivery of $1 worth of
Iron and Steel to final demand requires an expansion of $0.18 in
Products of Petroleum and Coal, $0.07 in Railroad Transportation, and
$0.09 in Scrap and Miscellaneous Industries.
Tables 1, 2, and 3, along with appropriate documentation, con-
stitute a complete interindustry study. Each industry will of course
be backed up by a report which provides much greater detail and
exhaustive statements of procedures and sources.
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