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Efficient Investment and Growth Consistency in the Input-Output Frame: An Analytical Contribution

Sajal Lahiri

Abstract

This paper proposes a simple and straightforward method of finding a consistent and efficient set of sectoral capacity growth rates and output and investment levels in a dynamic input-output (IO) model with given production capacities at a certain "base period" of time and given consumption targets for a later "terminal period." The basic problem is that terminal capacities have to be consistent with terminal production requirements as given by the consumption targets, intermediate input requirements, and investment, where both the latter are treated endogenously. The basis for endogenous investment is (a) the assumption that the planning period as a whole is characterized by a set of constant sectoral growth rates and (b) the assumption that investment does not create any excess capacity. These two assumptions form the core of the notions of consistency and efficiency respectively. The method proposed is an integrated iterative procedure with endogenous revision of the division of sectors between those operating at full capacity (bottleneck) and the rest, output and investment levels, and rates of growth. The method is, in fact, a straightforward adaptation of the standard method of solving an IO model by power series expansion. The paper also discusses the method of target revision taken in conjunction with prior bounds on growth rates and certain aspects of the relation between investment and technology in the frame of the model proposed. It ends with a brief review of the literature, criticizing, in particular, the methods and approaches followed in a large number of applied planning models to tackle the set of issues discussed.