Input-output modelling of the urban and regional economy: The importance of external trade

The modelling of regional and local economies, especially through using the input-output (IO) approach, is a standard practice for many economic consultants and yet quite often this is based on little if any primary data on (interregional) exports and imports. This paper argues that the relative size of the trade sector in final demand, and its importance in the literature on regional growth, is such that current models are at best misspecified and are at worst likely to provide biased and possibly misleading results, especially with regard to planning and policy at the local level. On a more practical level, this paper shows that with certain minimum information, especially with regard to exports and imports, a hybrid local IO table can be constructed that provides reasonable accuracy ill terms of estimates of IO multipliers vis-ci-vis a complete survey table (which is almost prohibitively expensive to construct). This is in contrast to the results obtained from the more usual LQ approach which, primarily because it underestimates trade, are seriously biased.