Supply Constraint from Earthquakes in Japan in Input-Output Analysis

Area of Science:

• Economics
• Disaster Economics
• Input-Output Analysis

Background:

• Disasters impose exogenous flow damage, creating supply constraints that are inadequately addressed by standard input-output analysis (IOA).
• Existing IOA models like the Leontief quantity model (LQM), Ghosh quantity model (GQM), Leontief price model (LPM), and Ghosh price model (GPM) have limitations in handling supply constraints and endogenous production or fixed quantities.
• Production (sales) is an insufficient metric for disaster damage assessment compared to profit (margin), as it doesn't fully capture losses for upstream and downstream sectors.

Purpose of the Study:

• To propose a method for incorporating supply constraints into the Leontief price model (LPM) by introducing the price elasticity of demand.
• To utilize the loss of social surplus (SS) as a more accurate measure of disaster-induced economic damage.
• To apply the developed model to analyze the economic impact of major earthquakes in Japan.

Main Methods:

• Modification of the Leontief price model (LPM) to include supply constraints through the integration of price elasticity of demand.
• Estimation of disaster damage using the loss of social surplus (SS) as the primary metric.
• Empirical application of the model to Japan's five largest earthquakes (1995-2017) and the Great East Japan Earthquake (GEJE) of March 2011.

Main Results:

• Peak impacts of severe earthquakes show price increases of 10-20% and social surplus (SS) decreases of 20-30% compared to pre-disaster levels.
• The most severe economic damage typically lasts up to eight months, resulting in accumulated losses equivalent to 0.5 months of production (50% of initial month's SS).
• The Great East Japan Earthquake (GEJE) in five prefectures caused cumulative damage equivalent to 25 months of production, with recovery taking 37 months.

Conclusions:

• The proposed LPM with supply constraints and SS loss estimation provides a more comprehensive approach to quantifying disaster economic impacts.
• Earthquakes can lead to substantial, prolonged economic disruptions, affecting both prices and social welfare.
• The findings highlight the importance of considering supply-side effects and social surplus in disaster economic impact assessments.