41st Congress of the European Regional Science Association: "European Regional Development Issues in the New Millennium and their Impact on Economic Policy", 29 August - 1 September 2001, Zagreb, Croatia
Every once in a while, national governments face difficult decision problems regarding financial support of important domestic firms or even entire national national industries. Similar problems are often faced by regional or urban governments. Given these problems, it is important to get indications of the societal value of industries. In principle, input-output tables provide a lot of information in revealing the linkages between industries. On the basis of these tables, various measures of the value of industries have been derived. One of these measures is found by applying the 'hypothetical extraction method', originally proposed by Strassert (Jahrb.Nat.Stat., 1968) and refined and applied by, among others, Milana (MetrEc., 1985), Groenewold, Hagger & Madden (Reg.Stud., 1987) and Dietzenbacher & Van der Linden (J.Reg.Sci., 1997). This approach has two major drawbacks. First, it is a purely static approach, in which technological progress does not play a role at all. Second, it assumes that output and employment levels are purely demand-determined. In this paper, I propose a biregional supply-side input-output model with two factors of production (high-skilled and low-skilled labor) and interregional interindustry technology spillovers. Applying hypothetical extraction methods to this model yields an alternative framework for identifying important sectors in a dynamic sense.