In Vindication of the Ghosh Model: A Reinterpretation as a Price Model

Ghosh's 'supply-driven' input-output model is a well-known alternative for Leontief's traditional 'demand-driven' input-output model. The Ghosh model calculates changes in gross sectoral outputs for exogenously specified changes in the sectoral inputs of primary factors. Typically, the model is interpreted so as to describe physical output changes as caused by changes in the physical inputs of primary factors. It has been convincingly argued, however, that this interpretation in terms of quantities is implausible. In the present paper it is shown that the supply-driven input-output model becomes plausible, once it is interpreted as a price model. That is, sectoral output values change due to price changes, which are caused by price changes for the primary inputs. Therefore the term Ghosh price model is adopted for the supply-driven model, whereas the demand-driven model is referred to as the Leontief quantity model. Dual to this Leontief quantity model is the standard Leontief price model. It is shown that the results obtained by the two price models are equivalent. Interpreting the supply-driven input-output model as a price model also allows for a meaningful interpretation of the inverse matrix in terms of multipliers. As the dual to the supply-driven (or Ghosh price) model the Ghosh quantity model is derived, which is equivalent to the demand-driven (or Leontief quantity) model.