Adjusting Input–Output models for capacity utilization in service industries

Abstract

The Input–Output (I–O) models assume the stability of economic ratios and regional multipliers over the evaluation period. For manufacturing sectors, constant multipliers within a short-term period may present a reasonable picture of the real-world production function. Tourism industry, however, is composed of a variety of services in which total output and factor inputs are strongly influenced by capacity utilization (CU). A conceptual model is proposed in this paper which purports that shifts in CU for perishable services will lead to economies of scale in inputs, price changes in the final output, capacity constraint on domestic supply and substitution between input factors, especially between capital and labor. These factors simultaneously modify I–O ratios and multipliers. Traditional I–O analysis, which assumes constant economic ratios and multipliers, will therefore lead to biases in tourism impact estimates, especially to value-added components, as it does not reflect the changing costs of operation in response to shifting supply and demand.