A Case Study on Input–Output Analysis in the Defense Industry

Abstract

Recently, the defense budget, which includes the cost of purchasing weapons, has continuously and significantly increased in South Korea. This increase, which is entirely financed by the government, has raised the issue of the socioeconomic impacts of spending on the defense industry in areas, such as production, added value and job creation. In this regard, it is necessary to more accurately measure the impact of spending on the defense industry on domestic industry, but the Bank of Korea’s industry inducement coefficient, which measures industrial spillovers, is quite limited in measuring the industry inducement impact caused by weapon production. Therefore, this study explores how to estimate the industry inducement coefficient of the production of a specific weapon by utilising the current Bank of Korea input–output table, which is focused on private industry, and applies this methodology to the estimation of the input–output coefficient of the production of a specific weapon. As a result of the analysis, the input–output coefficient of a specific weapon was estimated to be approximately 1.18 times higher than that of the products of similar industries in the private sector in terms of production, 1.03 times higher in terms of value-added and 1.03 times higher in terms of employment. This suggests that the effect of fostering domestic industry through weapon production is somewhat greater than that of private industry and proves the efficacy of government investment in this sector.