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 consu ltants and yet quite often this is based on little if any primary data on ( interregional) exports and imports. This paper argues that the relative siz e 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 a nd are at worst likely to provide biased and possibly misleading results, e specially with regard to planning and policy at the local level. On a more practical level, this paper shows that with certain minimum information, es pecially 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 prohibitiv ely expensive to construct). This is in contrast to the results obtained fr om the more usual LQ approach which, primarily because it underestimates tr ade, are seriously biased.