Negative IO Supply Shock Analyses: A Disaster and a Solution

What is it about?

This chapter deals with impact analyses of negative supply shocks, such as natural and man-made disasters. One of the most used approaches to estimate the impacts of natural and man-made disasters, is the Inoperability IO Model. It is shown to be a regular demand-driven IO model formulated in relative changes that inadequately estimates only the negative demand-side impacts of disasters and completely ignores to positive substitution effects on the supply-side of the economy. An easy to use Supply-Use programming model is presented as an alternative. Its basic assumption is that all economic actors, after a disaster, primarily try to restore their old pattern of economic transactions, as much as possible. By adding the usual fixed ratio assumptions of IO and SU models an indication is given of the heavy over-estimation of the negative impacts of a negative supply shcok when demand-driven IO of SU models are used.

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