Social Accounting Matrix Model and its Application
4.3 Structure of the social accounting matrix table
4.3.1 Overview of structures
S O C I A L A C C O U N T I N G M AT R I X M O D E L A N D I T S A P P L I C AT I O N 121
starts a new cycle. Since the SAM tables are shown as a two-dimensional table, a conceptual understanding on how the money flows among them should help you understand the struc- ture of the SAM tables in the following section.
The table contains production activities, factors (of production), and institutions as men- tioned previously. A new component, Others include trade accounts with the RoW, which can be any trade with regions/nations outside of the territory of your SAM table. If your SAM represents a nation, then the RoW refers to other nations. If your SAM represents certain region such as state or prefecture, then the RoW includes other regions (other states or prefec- tures) in the same nation and the RoW.
… Production activities columns
Area A of Table 4-1 represents production activities within the industrial sectors, which are the activities that the I-O captures. In that sense, A is a submatrix containing the transaction table of the I-O structure. For example, in this SAM transaction table, you can see through the 3 3 interindustry transactions table, where agriculture, manufacturing, and services sectors interact with each other to purchase and sell intermediate goods and services. The production activities column shows you the recipe, i.e. all the necessary ingredients (inputs), to produce outputs.
As we have noted, industry requires labor input. Spa facilities at the Intercontinental Hotel require not only inputs of flowers, shampoos, massage oil, towels, but also inputs of the labor of the staff to sell as a luxurious spa package to guests. Those labor inputs are captured at the area F, where factors (of production) are required as inputs by the production activi- ties. So the labor was provided from factors row to production activities column, as shown by arrow (3) in Figure 4-1. The area F also indicates that monetary flow occurred in the opposite direction simultaneously. Namely, production activities must have given the monetary con- sideration, wages, to the factors (i.e. arrow (4) in the Figure 4-1).
Again, the industrial sectors pay the wages in exchange for the labor they utilize, and not for a mere ownership of the labor. For example, your general manager pays the wage for your hard work that they can utilize for their service production, and not merely for your presence.
The reason why such an obvious fact is mentioned is to explain the reason for the lack of any interactions between the productions activities column and institutions row. Another example would be capital (in a broader sense than in finance and accounting). If one tribe chief owns a huge amount of cash or land, it does not automatically mean the chief will receive profits and rent. Only when the chief’s capital is provided for production activities will the chief’s capital will receive payments for rent. When the chief’s land has no tenants, when the chief’s cash is kept in a closet (because nobody can pay the interest rate that the chief demands), there would be no rent, even though the chief owns those capitals.
The last area where the production activities column intersects with others (trade) (the cell containing (4, 1)) shows ingredients that production activities require from outside of the studied geographic region of the SAM. If your SAM represents a nation, this area represents imported inputs that industrial sectors require for their production of goods and services.
Figure 4-1 did not include any trade with outside nation/region, but in the real world, no nation can remain completely secluded from the RoW.
S O C I A L A C C O U N T I N G M AT R I X M O D E L A N D I T S A P P L I C AT I O N 123
… Factors (of production) column
The factors of production column has fewer interactions with other rows as it does not have any inputs from production activities or factors. It has significant inputs from the institutions row which, based on what we have learned so far, must have received money in exchange.
These two flows are depicted by arrow (5), representing input from institutions (row 3) to fac- tors (column 2), and by arrow (6), representing the money flowing from factors (column 2) to institutions (row 3) in the Figure 4-1. This area is shown as W where the earnings of factors are distributed to the owners of those factors. A brief explanation of arrow (5) in Figure 4-1 with regards to the table is difficult, but it may be interpreted as placement of endowments (to the exchange market of labor and capital). Ownership of endowment does not guarantee a flow of income to the owners. Even if a person has a doctorate, the person cannot receive a wage until he/she is employed. Likewise, the owner of land worth $1 billion cannot receive an income until the land is rented out.
At the bottom of the factors column is the area that intersects with the Others (trade) row exists, which is shown as (4, 2). An example of this would be a Dominican hotel employee working at a hotel in Dubai. When the person provides his/her competitive labor for produc- tion activities in the host nation, their employment is exchanged for wages. However, if they left their family in their home countries, their labor income will not all be spent via institu- tions in the host nation, as some will be sent to their family members in their home nations.
This is a leakage that occurs from factor payment to institutions.
… Institutions column
The largest components of the institutions are households, as we discussed in the I-O struc- ture. Institutions also include governments and firms, even though their relative sizes are not as large as households. The institutions column has the area C, where it intersects with rows of the production activities. What would households need from production activities?
Households need to fulfill their final demands by purchasing goods and services from various industrial sectors, such as fresh tomatoes from the agriculture sector, bottled orange juice from the manufacturing sector, and a spa treatment from the services sector. Those are consumption by consumers as shown by arrow (1) in Figure 4-1. In exchange for delivering goods and services, industrial sectors receive payment, which is shown by arrow (2) in the Figure 4-1.
Part of the money which flows into the industrial sectors will be utilized to compen- sate the required labor input, and the money will be paid by production activities to the fac- tors. The circular flow of money will continue. This circulation of monetary flow beyond the boundary of production activities (i.e. the I-O) is well captured in the SAM structure.
There is one point that should be noted regarding tourism-related expenditures. While hosting visitors from outside of the region/nation provides the study region the same effect as exports and goods and services, it is not captured as pure exports (at (1, 4) where p roduction activities intersects with the others column). Even though foreign visitors are no nresidents,
their tourism-related expenditures in the study region are captured as if those are made by the local residents at C (where production activities intersect with institutions).
Interesting interactions occur in the area where institutions column intersects with insti- tutions row. Recall that institutions include households, as well as firms and governments.
Since households is the larger component within institutions, we disregarded the other two for the sake of simplicity of the model. Let us now consider interactions between house- holds and governments. In many of the nations, governments collect a proportion of gross income of households as income tax as long as people are employed and the monetary flow occurs from households to governments. (Some oil-exporting nations in the Arabian Gulf region have no income tax, as the significant government revenues come from sales of oil to the RoW.) In some nations, there is a generous government transfer, such as food stamps in some Western nations or even subsidy for families with extra children, such as France or Japan. In those cases, the monetary flows occur from government to households. Also, g overnments may issue sovereign or municipality bonds, with which coupon payments (i.e. interest payments) may be made from the government to households and firms, unless they are zero-coupon bonds. Households may hire some labor directly from other house- holds for domestic jobs, such as baby sitting, lawn cutting, snow removal, etc. What are com- mon among those transactions would be that they are interinstitutions transfers of goods (services) and payments.
The fifth cell, shown as (4, 3) is the cell which intersects with Others. While the (4, 1) and (4, 2) are both related with cross-boundary transactions, the case for (4, 3) is somewhat differ- ent, even though they all have common features such as leakages. Let us concentrate on the larger component of the institutions, i.e. households. When households receive wages, rents, and profits in exchange for their delivery of labor and capitals, not all the money they receive would be used. Certain portion of the wages may be saved. In the SAM model, the saving by households (4, 3) would be considered as a leakage from the model, just like (4, 1) and (4, 2) are considered as leakages, because settlement payments for imports are the money outflow from the model.
… Others (trade) column
The others column is often titled RoW, as it deals with interactions outside of the regional/
national economy. The column side of the others represents mainly exports of goods and services, where monetary flow comes into the domestic economic system.
The cell where the column intersects with production activities, row (1, 4), is basically the receipt of monetary payments by the industrial sectors in exchange for industrial sectors’
exports of goods and services to outside the economic system. This is where the money comes into the economic system from outside to stimulate interindustry transactions.
The next cell in the column, (2, 4), where the column intersects with factors of production requires is more complex. When we looked at the cell where the factors column intersects with the others, it was the leakage of factors income.
S O C I A L A C C O U N T I N G M AT R I X M O D E L A N D I T S A P P L I C AT I O N 125
For example, a Finnish employee is working on the Executive Floor at 6-star luxury hotel in Dubai, United Arab Emirates (UAE). The employee left behind her family members in Helsinki, to which she remits her income. Then on the SAM table of the UAE, her labor is put as required ingredients of the hotel sector, which is captured at F. Then when the factors gives the wage back to its owner, the employee, instead of putting all the wage into the domestic institutions as shown in W, she makes remittance of the money, which appears in the cell (4, 2), as if UAE hotel sector imported the factors. At the same time, if we consider the Finland’s SAM table, her remittance from abroad will be recorded at (2, 4) as if she exported her factors to overseas.
The cell where the column intersects with institutions (3, 4) is where the institutions’
receipt from outside of the region is recorded. This cell usually does not have large num- bers. Recall that households receive substantial income from factors only when they put their labors and capital into the factors, which is an exchange market for labor and capital. There is not much to receive if their resources (labor and capital) are not put into the economic system.