Efficiency analysis of a multisectoral economic system

Abstract

The present paper is concerned with efficiency analysis applied to a single economy represented by the Leontief input–output-model extended by the constraints for primary factors. First, the efficiency frontier is generated using a multi-objective optimization model instead of having to use data from different decision making units. The solutions of the multi-objective optimization problems define efficient virtual decision making units and the efficiency of the given economy is defined as the difference between the potential of an economy and its actual performance and can be obtained as a solution of a DEA model. It can be shown that the solution of the above defined DEA model yields the same efficiency score and the same shadow prices as the models by ten Raa (Linear analysis of competitive economics, LSE handbooks in economics. Harvester Wheatsheaf, New York, 1995; The economics of input–output analysis. Cambridge University Press, Cambridge, 2005) despite the different variables used in both models. Using duality theory of linear programming the equivalence of the approaches permits a clear economic interpretation. In the second part of the paper this approach is extended to the Leontief augmented model including emissions of pollutants and abatement activities. In this way the eco-efficiency of an economy can be analyzed.

Recessions are easily recognizable from a decrease in GDP. What really should interest us, however, is the difference between the potential of an economy and its actual performance (J. Stiglitz, 2002).