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The impact of energy costs on industrial activity

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Publisher
Keio Economic Observatory

Abstract

The purpose of this paper is to show some empirical andtheoretical results obtained from our basic study on the inpactof rising oil prices on industrial activity . The study followstwo propositions, one of which is substantive, the other of whichis methodological. The substantive proposition is the necessityof converting the standard assumption regarding the market mechanismfrom one that implicitly assumes perfect competition in internationaltrade as well as in domestic trade to one that recognizes theburgeoning technological-linkage among various sectors and consequently,the rapidly growing inter-dependence among various countries .This means that because a rigid structural relationship appears inone part or the whole of an economic system as the economy becomeshighly industrialized, this structural rigidity leads to a distortionof the perfectly competitive market mechanism which must be incorpo -rated in our analytical framework.The methodological proposition is divided into two parts .The first is the necessity of analyzing the changes in industrialactivity after the oil crisis in a framework which takes account oftide economic interdependence among various countries . This wasaccomplished by using the"International Input-Output table"whichwas recently developed and published by the Institute of DevelopingEconomies (Japan, June, 1982). Including the U.S., Korea, Japanand Asean countries, this table links each national input -outputtable through international trade matrices classified by commodityby country and thus provided an appropriate framework in which toconduct our analysis.The second methodological proposition concerns reducing thecomplex indeces usually given concerning national economic datafor different countries into a more simple index of technologycharacteristics determined statistically on the basis of commoditydata. This simple index is felt to be more appropriate forcomparing national economies than the usual indeces concerningnational economic data, because the diversity of national economiescan be unified into a definite set of categories determined bythe characteristics of commodity technology . The procedure forthis simplification will be discussed later in detail .

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