Hudson 1974

U. S.
Energy Policy and Economic Growth, 1975-2000

Author(s): Edward A. Hudson and Dale W. Jorgenson
Source: The Bell Journal of Economics and Management Science, Vol. 5, No. 2 (Autumn, 1974),
pp. 461-514
Published by: RAND Corporation
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U. S. energypolicy and economic
growth,1975-2000
Edward A. Hudson
Senior Economist
Data Resources, Incorporated
and
Dale W. Jorgenson
Professor of Economics
Harvard University
This paper presentsa new approachto the quantitativeanalysisof

U.S. energypolicy,based on an integrationof econometricmodel-
ing and input-outputanalysis.It incorporatesa new methodology
forassessingthe impactof economicpolicy on both demand and
supplyforenergywithina completeeconometricmodelof the U.S.
economy.The modelconsistsof productionmodelsfornineindus-
trial sectors,a model of consumerdemand,and a macro-econo-
metricgrowthmodelforthe U.S. economy.The model is firstused
to projecteconomicactivityand energyutilizationfor the period
1975 to 2000 undertheassumptionof no changein energypolicy.
The modelis thenemployedto designa tax programforstimulating
energyconservationand reducingdependenceon importedsources
of energy.The overall conclusionof the analysisof tax policy is
thatsubstantialreductionsin energyuse can be achieved without
major economiccost.
* The dramaticincreasein worldpetroleumpricesassociatedwith 1. Introduction

theArab oil embargoof October1973 has highlighted theneed for
a new approach to the quantitativeanalysis of economic policy.
Econometricmodelsin theTinbergen-Klein moldhave provedto be
veryusefulin studyingtheimpactof economicpolicyon aggregate
demand.' At the same timethese models do not providean ade-
quate basis forassessingtheimpactof economicpolicyon supply.
Input-outputanalysisin the formoriginatedby Leontiefis useful
for a verydetailed analysisof supply,predicatedon a fixedtech-
nologyat anypointof time.2Input-output analysisdoes not provide
Dale W. Jorgenson receivedtheB.A. fromReed College (1955), and the

A.M. and Ph.D. fromHarvard University(1957 and 1959, respectively) .
He was the 1971 recipientof theJohnBates Clark Medal of the American
EconomicAssociation.His interests includethe econometrics of production
and investment.
Edward A. Hudson receivedthe B.A. fromVictoriaUniversity, New
Zealand, in 1968 and the Ph.D. from Harvard Universityin 1973. His
researchinterests
includeenergyeconomicsand public finance.
1 The seminalcontribution to macro-econometric modelingof the U. S.
economyis the Klein-Goldberger model in [27]. For a recentreviewof
macro-econometric modelsof the UnitedStates,see Hickman[23]. POLICIES FOR ENERGY
2 For theoriginaldevelopment of input-output
analysis,see Leontief[30]. EQUILIBRIUM / 461

a means of assessingthe impactof changesin technologyinduced
by pricevariationsassociatedwithchangesin economicpolicy.
The purposeof thispaper is to presenta new approachto the
quantitativeanalysisof 'U. S. energypolicy.3 This approachis based
on an integration of econometricmodelingand input-output anal-
ysisand incorporatesan entirelynew methodology forassessingthe
impactof economicpolicyon supply.We combinethedeterminants
of energydemandand supplywithinthesame framework and relate
patternsof U. S. economicgrowthto bothdemandand s-upply. Our
approachcan be used to projectU. S. economicgrowthand energy
utilizationforanyproposedU. S. energypolicy.It can be employed
to studythe impactof specificpolicy changeson energydemand
and supply,energypriceand cost,energyimportsand exports,and
on U. S. economicgrowth.
The firstcomponentof our framework forenergypolicyanal-
ysisis an econometricmodel of interindustry transactionsfornine
domesticindustries.We have subdividedthe businesssectorof the
U. S. economyinto nine industrialgroupsin orderto providefor
the detailedanalysisof the impactof U. S. energypolicy on the
sectorsmost directlyaffectedby policy changes.The nine sectors
includedin the model are:
(I) agriculture,nonfuelmining,and construction

(2) manufacturing, excludingpetroleumrefining
(3) transportation
(4) communications, trade,and services
(5) coal mining
(6) crudepetroleumand naturalgas
(7) petroleumrefining
(8) electricutilities
(9) gas utilities.
Our interindustry modelincludesa modelof demandforinputsand

supplyof outputforeach of the nine industrialsectors.The model
is closed by balance equationsbetweendemandand supplyforthe
productsof each of thenine sectors.
The principalinnovationof our interindustrymodel is thatthe
input-output are treatedas endogenousvariablesrather
coefficients
thanexogenouslygivenparameters.Our modelforproducerbehav-
ior determinesthe input-output coefficientsfor each of the nine
sectorslisted above as functionsof the prices of productsof all
sectors,the pricesof labor and capital services,and the prices of
competingimports.We determinethe prices of all nine products
and the matrixof input-output coefficients
simultaneously.In con-
ventionalinput-outputanalysis the technologyof each sector is
takenas fixedat any pointof time.Prices are determinedas func-
tions of the input-output but the input-output
coefficients, coeffi-
cientsthemselvesare treatedas exogenouslygivenparameters.Our
approachintegrates conventionalinput-output analysiswitha deter-
A recentcompendiumof researchon input-output analysisis Carterand

Brody [10].
EDWARD A. HUDSON AND of our approachis containedin Jorgen-
3 A more detailedpresentation
462 / DALE W. JORGENSON and Hudson[26].
son,Berndt,Christensen,

minationof the structure of technologythroughmodels of supply
foreach industrialsector.
The second componentof our frameworkfor energypolicy
analysisis a macro-econometric growthmodel.The completemodel
consistsof endogenousbusinessand householdsectorsand exoge-
nous foreignand governmentsectors. The chief noveltyof our
growthmodel is the integration of demand and supplyconditions
forconsumption, investment, capital,and labor. The modelis made
dynamicby linksbetweeninvestment and changesin capital stock
and betweencapitalservicepricesand changesin investment goods
prices. The model determinesboth componentsof gross national
productin real terms,as generatedby conventionalmacro-econo-
metricmodels, and relativeprices of labor and capital services
requiredby our econometricmodel of interindustry transactions.
Our approachto theanalysisof macro-economic activitycan be
contrastedwith the analysis that underlies macro-econometric
models used for short-term forecasting.Short-term forecastingis
based on the projectionof demand by foreignand government
sectorsand the determination of the responsesof householdsand
businessesin theformof demandsforconsumptionand investment
goods. The underlying economictheoryis essentiallytheKeynesian
multiplier, made dynamicby introducing lags in the responsesof
householdsand businessesto changes in income. In short-term
macro-econometric models the supplyside is frequently absentor
presentin only rudimentary form.4Our approach integratesthe
determinants of demand employedin conventionalmacro-econo-
metricmodels withthe determinants of supply;this integration is
essential to the successfulimplementationof our interindustry
model for longerrun analyses.
Given a frameworkthatincorporatesthe determinants of de-
mand and supplyforenergyin the U. S. economy,our firstobjec-
tiveis to providea referencepointforthe analysisof energypolicy
by establishingdetailed projectionsof demand and supply,price
and cost, and importsand exportsforeach of the nine industrial
sectorsincluded in our model. For this purpose we project the
level of activityin each industrialsectorand relativepricesforthe
productsof all sectors for the years 1975 through2000. Our
projectionsincludethelevelof macro-economic activityin theU. S.
economyand the matrixof input-output coefficientsforeach year.
Projectionsforthefiveindustrialsectorsthatformtheenergysector
of theU. S. economyprovidethe basis fortranslating our detailed
projectionsinto the energybalance frameworkthat has become
conventionalin the analysisof patternsof energyutilization.5
Our interindustry approach imposes the same consistencyre-
quirementsas theenergybalance approach,namely,thatdemandis
equal to supplyin physicaltermsforeach typeof energy.In addi-
tion,our approachrequiresthatdemand and supplybe consistent
withthesame structure of energyprices.This additionalconsistency
4 In the Klein-Goldberger model the determination of prices can be

completely suppressedwitha resultingimprovement in forecasting
accuracy
forrealmagnitudes.See Suits[38] and Goldberger[22].
5 The energybalanceframework has beenemployedby Dupree and West POLICIES FOR ENERGY
[20] and theNationalPetroleumCouncil[35, 36]. EQUILIBRIUM / 463

requirement is absentfromenergybalance projectionsand requires
the integrationof energybalance projectionswith projectionsof
energyprices.Our interindustry model providesa means of com-
bining these projectionswithina frameworkthat also includes
prices and interindustrytransactionsfor the sectorsthat consume
but do not produceenergy.
To illustratethe applicationof our model to the analysisof
U. S. energypolicywe have analyzedthe effectsof tax policiesto
stimulateenergyconservationon the futurepatternof energy
utilization.Our methodologyfor policy analysisbeginswitha set
of projectionsthat assume no major new departuresin energy
policy.We thenpreparean alternative setof projectionsincorporat-
ing the proposedchangein policy.In analyzingthe impactof tax
policywe have incorporatedthe effectof energytaxes on demand
and supplyfor energy.We findthat price increasesprovide the
economicincentivefor the adoptionof energyconservationmea-
suresthatwill resultin considerablesavingsof energy.Tax policies
or othermeasuresto increasethe price of energycould resultin
U. S. independencefromenergyimportsby 1985.
We presentour modelforinterindustry transactionsin Section2
of the paper. In Section 3 we presenteconometricmodels of pro-
ducer behaviorforeach of the nine sectorsincludedin our inter-
industrymodel. We then outline our macro-econometric growth
modelin Section4. In Section5 we presentprojectionsof economic
activityand energyutilizationfor the period 1975 through2000.
In Section6 we discussa tax programforstimulating energycon-
servationand eliminating relianceof the U. S. economyon energy
imports.
2. Interindustrymodel * The firstcomponentof ourframework forenergypolicyanalysis

is a model of interindustry transactionsfor the United States.
Ratherthananalyzingenergyutilizationin isolation,we beginwith
an analysisof the entireU. S. economy and then proceed to a
detailed examinationof the energysector as one among many
interdependent componentsof the economy. This perspectiveis
necessarilymore complex and more detailedthan traditionalper-
spectiveson the analysisof the energysector,but is indispensable
to thestudyof theinteractionof energyresourcesand thegrowthof
theU. S. economy.
Our interindustrymodelpermitstheanalysisof theentirechain
of productionfromthe purchase of primaryinputsthroughthe
variousintermediate stagesof productionto the emergenceof final
productsto be absorbedin consumption,investment, government,
or exportfinaldemand.The structure of productionincludesall of
U. S. domesticsupplyof goods and services,but our specification
providesfordetailedanalysisof the impactof U. S. energypolicy
on the sectorsmost directlyaffectedby policy changes.We have
classifiedproductioninto nine industrialsectors,each of which
purchasesprimaryinputs,makes purchasesfromand sales to the
otherproducingsectors,and sells finishedoutputto finalusers.The
EDWARD A. HUDSON AND flow of interindustrytransactionsis representedin diagrammatic
464 / DALE W. JORGENSON formin Figure 1.

FIGURE 1
INTERINDUSTRY TRANSACTIONS: DIAGRAMMATIC REPRESENTATION
INPUT TO:
1 2 3 4 5 6 7 8 9 10 11 12 13 14
2
3
4
2 5 INTERINDUSTRY
0 Z
0z 6 TRANSACTIONS a_
FINAL Z
H7 0
Z) 8 X :DEMAND
H8<
0 9 0
10
11 PRIMARY INPUTS
12 1 _ _ _ _ _ __ _ _ _ _ _
131 TOTAL INPUT
INTERMEDIATE SECTORS:
1. AGRICULTURE, NONFUEL MINING AND CONSTRUCTION.
2. MANUFACTURING, EXCLUDING PETROLEUM REFINING.
3. TRANSPORT.
4. COMMUNICATIONS, TRADE, SERVICES.
5. COAL MINING.
6. CRUDE PETROLEUM AND NATURAL GAS.
7. PETROLEUM REFINING.
8. ELECTRIC UTILITIES.
9. GAS UTILITIES.
PRIMARY INPUTS, ROWS:
10. IMPORTS.
11. CAPITAL SERVICES.
12. LABOR SERVICES.
FINAL DEMAND, COLUMNS:
10. PERSONAL CONSUMPTION EXPENDITURES.
11. GROSS DOMESTIC PRIVATE INVESTMENT.
12. GOVERNMENT PURCHASES OF GOODS AND SERVICES.
13. EXPORTS.
Our interindustry model consistsof balance equationsbetween

supplyand demand for the productsof each of the nine sectors
includedin the model. The model also includesaccountingidenti-
ties betweenthe value of domesticavailabilityof these products
and the sum of values of intermediateinput into each industry,
value added in the industry,and importsof competingproducts.
Demands for the productsinclude demandsfor use as inputsby
each of theninesectorsincludedin themodel.The restof domestic
availabilityis allocated among four categoriesof final demand:
personalconsumptionexpenditures, grossprivatedomesticinvest-
ment,government and exports.
expenditures,
In themodelforprojectingenergydemandand supplywe take
thelevelsof finaldemandforall industriesfromthe macro-econo-
metricmodel presentedin Section 4, below. Second, for the five
energysectorsof the model we take the price and quantityof
importsto be exogenous.For the fournonenergysectorswe take
thepricesof importsas exogenousand determineimportquantities POLICIES FOR ENERGY
along with the quantitiesof capital and labor services in each EQUILIBRIUM / 465

industry.6 The prices of capital and labor servicesare determined
withinthe macro-econometric model. We take the quantitiesof
exportsand government purchasesof the outputof each industry
as exogenous.We also take theallocationof investment amongthe
industriesof originto be exogenous.
Our interindustry model consistsof modelsof producerbehav-
ior foreach of the nineindustriesincludedin the model. Producer
behavior in each industrycan be characterizedby input-output
coefficientsfor the inputof productsof each of the nine sectors,
inputsof capital and labor services,and, for the fournonenergy
sectors,thelevelof competitive imports.An interindustry approach
to the studyof energyresourcesis essential,since most energyis
consumed as an intermediateratherthan a finalproductof the
economy.Examples of intermediate productswould be fossilfuels
consumed by the electric generatingsector. Examples of final
productswouldbe gasolineand heatingoil consumedby thehouse-
hold and government sectors.Energybalance modelsprovidepro-
jectionsof the levels of both intermediateand finaldemand.
Given the pricesof domesticavailabilityof the outputof each
sectorincludedin our model,we determinethe allocationof per-
sonal consumptionexpendituresamong commoditygroupsdistin-
guished in the model, using our model of consumerbehavior.
Personalconsumptionexpenditures includedeliveriesto the house-
hold sectorby eightof theninesectorsincludedin our interindustry
model of the producingsector.There are no directdeliveriesof
crudepetroleumand naturalgas to personalconsumptionexpendi-
tures.These productsare deliveredfirstto the petroleumrefining
and gas utilitysectorsand thento personalconsumptionexpendi-
turesand to othercategoriesof intermediate and finaldemand.
Personalconsumption expendituresalso includenoncompetitive
importsand theservicesof dwellingsand consumers'durables.The
levels of personalconsumptionexpenditures on each of the eleven
commoditygroupsincludedin our model of the householdsector
are determinedfromthe projectedlevel of personalconsumption
expendituresfromthe macro-econometric model, fromthe prices
of domesticavailabilityof theoutputof each sectorincludedin the
interindustrymodel,and fromthepricesof noncompetitive imports,
consumers'durables services,and housingservices.The price of
noncompetitiveimportsis taken to be exogenous. The capital
servicepricesforconsumers'durablesservicesand housingservices
are determined fromthe priceof capital servicesdeterminedin the
macro-econometric model.
The equationsrepresenting the balance of demand and supply
foreach of thenine sectorsof theinterindustry model set domestic
availabilityequal to the sum of intermediatedemands and final
demand.Intermediate demandsare determined simultaneously with
thelevelsof outputof each industry, giveninput-output coefficients
determinedin the model of producerbehavior.The input-output
6 Energyimportsare significant only for crude and refinedpetroleum

productsand naturalgas. For the period 1958 to 1972 petroleumimports
were subjectto a systemof quotas. Naturalgas importsare subjectto reg-
EDWARD A. HUDSON AND ulationby the Federal Power Commission.For a discussionof the petro-
466 / DALE W. JORGENSON leumimportquota system,see Burrowsand Domencich[8].

coefficientsare determinedsimultaneously with the prices of do-
mesticavailabilityof the outputof each industry.Finally,levels of
capital and labor servicesfor all sectorsand competitiveimports
for the fournonenergysectorsare determinedfromthe levels of
domestic availabilityand the correspondinginput-outputcoeffi-
cients.These levelscan be comparedwiththelevelsprojectedin the
macro-econometric model.
D Interindustrytransactions.We firstdescribe our model of

interindustrytransactionsand then outlinethe applicationof this
modelto theprojectionof energydemandand supply.Our notation
is as follows:
XIJ intermediatedemandfortheoutputofindustry I by
industry J;
YI finaldemandforoutputof industry 1;
XI = domesticavailabilityoftheoutputof industry
I;
Pl priceof theoutputof industry
I.
To simplifythe notationwe take the price of the outputof each
industry to be the same in all uses. The deflatorsforeach category
of intermediate and finaldemand can differ.In projectingenergy
demand and supply we take the ratios of the deflatorfor the
individualcategoriesof demandto the deflatorfordomesticavail-
abilityof outputof theindustry to be exogenous.
The interindustiy model consistsof equalitybetweendemand
and supply for each of the nine sectorsincluded in the model.
The balance equationsfor the nine sectorsare:
9
XI= XIJ + Yl, (I=--1, 2... 9). (1)

J=1
In addition,the model includesaccountingidentitiesbetweenthe

value of domesticavailabilityand thesum of values of intermediate
inputinto the industry,value added in the industry,and, for the
four-nonenergy sectors,the importsof competingproducts:
9
PIPXI PJ XJI + PK KI + PL*LI + PRI*RI, (2)

J,=1 (I
-(1,2 - 9),
where:
KI -quantity ofcapitalservicesin industry I;
LI quantityof laborservicesin industry
I;
RI - competitive importsoftheoutputofindustry I;
PK priceof capital services;
PL -- priceof labor services;
PRI priceof competitive importsto industry I.
Again,pricesof capital and labor servicescan differamongindus-
tries.To simplifynotationwe take the prices of these productive
factorsto be thesame in all industries.
In projectingenergydemand
and supplywe take the ratiosof servicepricesforeach industry to
the corresponding pricesfromthe macro-econometric model to be
exogenous. POLICIES FOR ENERGY
Our interindustry model includesmodels of producerbehavior EQUILIBRIUM / 467

foreach of thenine industrialsectorsincludedin the model. These
models of producerbehaviorcan be derivedfromprice possibility
frontiers
forthe nine sectors:
AlPYI - GI(Pl, P2, ...P9; PK, PL, PRI), (3)
(I 1, 2 ... 9),
whereAI(I 1, 2 . . . 9) is an index of the level of Hicks-neutral
technologyin industryI. The price possibilityfrontierfor each
sectorcan be derivedfrompricepossibility frontiers foreach of the
threesubmodelsemployedin our analysisof productionstructure :7
(1) a model givingthe price of outputas a functionof prices

of fouraggregateinputsin each sector-capital (K), labor (L),
energy(E), and materials(M);
(2) a modelgivingthepriceof aggregateenergyinputin each
sectoras a functionof thepricesof thefivetypesof energyincluded
in themodel-coal, crudepetroleumand naturalgas, refinedpetro-
leumproducts,electricity,and gas as a productof gas utilities;
(3) a model givingthe price of aggregatenonenergyinputin
each sectoras a functionof thepricesof thefivetypesof nonenergy
inputinto each sector-agriculture,manufacturing, transportation,
communications, and, for the fournonenergysectors,competitive
imports.
Given the prices of capital services,labor services,and com-
petitiveimportsin each of the four nonenergysectors,we can
determinethe pricesof domesticavailabilityof outputPI (I 1,
2 ... 9) for all nine sectors.To determinethese prices we solve
twenty-seven equations for prices of domesticavailability,prices
of aggregateenergyinput,and pricesof aggregatenonenergy input
intoall ninesectors.This systemof twenty-seven equationsconsists
ofthreeequationsforeach sector.These threeequationscorrespond
to productionpossibilityfrontiers foreach of the threesubmodels
for each sector. In these computationswe are makinguse of a
nonsubstitution theoremof the typefirstdiscussedby Samuelson.8
This theoremstatesthatforgivenpricesof thefactorsof production
and competitiveimports,the pricesof domesticavailabilityof the
outputof each sectorare independentof the compositionof final
demand.
The second step in our analysisof interindustrytransactionsis
to deriveinput-output coefficientsfor each of the nine industrial
sectors included in our interindustry model. The input-output
coefficientscan be expressedas functionsof the prices.First,the
relativeshare of thejth intermediate inputcan be determined from
the identity:
& In PI P1*2(11 Pi
dOlnPl PJ pJIyj = PJ*AJI, (I, J = 1, 2 ... 9), (4)
whereAJI is the input-output

coefficient
corresponding to XJI; it
J per unitof outputof
theinputof theoutputof industry
represents
7 For a detailed interpretationof the price possibilityfrontier,see

EDWARD A. HUDSON AND Christensen,
Jorgenson, and Lau [18], especiallypp. 32-33.
468 / DALE W. JORGENSON 8 See Samuelson[371.

industry 1. Similaridentitiesdeterminethe relativesharesof capital
and labor servicesand competitiveimports.9
Second, we can divide the relativeshares by the ratio of the
price of domesticavailabilit of the outputof the Jthindustry, PJ
to the price for the Ith industry,P1, to obtain the input-output
coefficients:
xJ1
X =AJI(P1, P2 ... .P9; PK, PL, PRI), (5)
(I, J=- 1, 2. 9);
and
KI
X AKI(P1, P2 ... P9; PK, PL, PRI),
xi
LI
Xi -ALI(P1, P2 . . . P9; PK, PL, PRI), (6)
RI
xi ARI(P1, P2 . . . P9; PK, PL, PRI),
(I 1, 2 . .. 9).
For each industry we derivethe input-output coefficientsin two

steps.First,we determinethe input-output for the ag-
coefficients
gregateinputs-capital (K), labor (L), energy(E) and materials
(M). Second, we determinethe input-output coefficientsfor the
inputof each typeof energyinputper unit of total energyinput
and the input of each type of nonenergyinputper unit of total
nonenergyinput.To obtain the input-output coefficients required
forour interindustry modelwe multiply theinput-output coefficients
for each type of energyby the input-output coefficientfor total
energy.Similarly,we multiplytheinput-output coefficientsforeach
type of nonenergyinputby the input-output coefficientfor total
nonenergyinput. We obtain input-outputcoefficients for capital
services,labor services,fivetypesof energyinputsintoeach sector,
and fivetypesof nonenergy inputsintoeach sector.
The input-outputcoefficients for each of the nine industrial
sectorsincludedin our modelof interindustry transactions are func-
tionsof thepricesof capitalservices,labor services,and competitive
importsforthe fournonenergysectorsand the prices of domestic
availabilityof the outputof each of the nine sectors.The pricesof
domesticavailabilityare functionsof the pricesof capital services,
labor services,and competitiveimportsfor the four nonenergy
sectors.By the nonsubstitution theoremboth prices of domestic
availabilityand input-outputcoefficients are independentof the
compositionof finaldemand.10
9 For furtherdiscussionof the model of producerbehavior,see Section

3, below.
10The idea of treatinginput-outputcoefficients of pricescan
as functions
be tracedto Walras [41], especiallypp. 382-392; this approachhas been
extensivelydiscussedby Samuelson[37], pp. 513-536, and Morishima[33],
pp. 54-92. A moreinfluential idea is to model trendsin input-outputcoeffi-
cientswithouttreatingthemas partof a modelof producerbehavior.This
alternativeapproachhas been employedby Leontief[31], Carter [9] and
Almon,et al. [1]. Comparisonsof input-output coefficients
for 1947, 1958, POLICIES FOR ENERGY
and 1961 are givenby Carter[9] and Vaccara [40]. EQUILIBRIUM / 469

D Final demand. Final demand for domesticavailabilityof the
outputof each of the nine sectorsincluded in our interindustry
modelis allocatedamongpersonalconsumption expenditures,
gross
privatedomesticinvestment, government expenditures, and exports.
In projectingenergydemand and supplywe take aggregatelevels
of each categoryof finaldemand fromour macro-economicpro-
jections. We allocate personal consumptionexpendituresamong
the nine sectorsincludedin our model, employingaggregateper-
sonal consumptionexpendituresas totalexpenditures, on the basis
of the prices of domesticavailabilityof the output of all nine
sectors.Government expenditures and exportsof theoutputof each
sector are exogenous. Importsof the output of the five energy
sectorsare also exogenousso thatwe include only exportsnet of
importsin finaldemandforthesesectors.We take aggregateprivate
domesticinvestmentfrom our macro-economicprojections.We
take the relative proportionof investmentin the output of
each industrialsector included in our interindustry model to be
exogenous.
The finalstepin determining thelevel and compositionof inter-
industrytransactions is to determinethe levels of output,employ-
ment, and utilizationof capital for each of the nine industrial
sectorsincludedin our model and competitive importsforthefour
nonenergysectorsincludedin the model. This part of our model
coincideswithconventionalinput-output analysis.Given the input-
outputcoefficientsforall nine sectors,we can determinethe level
of outputfor each sectorfor any givenlevels of finaldemandfor
the outputof all nine sectors.We presentprojectedmatricesof
interindustrytransactionsin energyfortheyears1975, 1980, 1985,
and 2000 in Section5 below. We also presentprojectionsof energy
pricesfor each of these years.
Final demandfordomesticavailabilityof theoutputof each of
theninesectorsincludedin themodelis allocatedamongconsump-
tion,investment, government expenditures,and exports:
YIl CIl+11+ GI +Zl, ( 1, 2... 9), (7)
where:
CI- personalconsumptionexpenditureson the outputof
industryI;
II grossprivatedomesticinvestment in theoutputof in-
dustryI (the sum of gross privatefixedinvestment
and net inventorychange);
GI government expenditureon the outputof industryI;
ZI I (exportsless im-
exportsof the outputof inidustry
portsforthefiveenergysectors).
In our modelforprojectingenergydemandand supplywe take
the levels of final demand for all industriesfrom the macro-
economic projections.We link our interindustry model to our
macro-econometric model through the identities:
9
PCv C _ PI*CI9
EDWARD A. HUDSON AND I=1
470 / DALE W. JORGENSON

P1*1 Pl:lI, (8)
I=1
9
PG" G PI-`GI,
I=1.
9
pzz
PZ:Z- Z_ PI:1_ZI.
I
I=1
The values of personal consumptionexpendituresPC*C, gross

privatedomesticinvestment P1I*, government expenditurePG G,
and exportsPZ: Z fromthemacro-econometric model are set equal
to thesumsof each of thesecategoriesof expenditures
over all nine
includedin theinterindustry
industries model.
In the macro-econometric model government expenditureson
goods and servicesare dividedintotwo parts:
PG: G PIG IG + PCG CG, (9)
where
IG quantityof governmentexpenditureson investment
goods;
CG expenditureson consumption
quantityof government
goods;
PIG priceof government on investment
expenditures goods;
PCG price of governmentexpenditureson consumption
goods.
In makingprojectionsof energydemand and supplywe project
totalgovernment expendituresin currentand constantprices.Gov-
ernmentexpenditureson goods and servicesare exogenousto the
macro-econometric model. We then allocate total government ex-
pendituresamong the nine industrygroupsincludedin the inter-
industrymodel.
In our macro-econometric model net exportsof goods and ser-
vices are taken to be exogenous.For the purposesof projecting
energydemandand supplywe dividenet exportsbetweenimports
and exports, allocate exports among the nine industrygroups
includedin themodel,and projectthepricesof competitive imports
for each of the nine sectorsof the model. Since net exportsin
currentand constantprices are exogenous to the macro-econo-
metricmodel,thischangein the treatment of net exportsdoes not
alter the structureof the completemodel. In projectingenergy
demandand supplywe takethepricesof importsforeach industrial
sectortogetherwithlevels of capital and labor servicesfor each
sector.
We projectgross piivate domesticinvestmentin currentand
constantpricesin our macro-econometric model.To projectenergy
demandand supplywe allocate grossprivatedomesticinvestment
amongthenineindustry groupsincludedin themodel.The relative
proportions of investmentoriginating
in each sectorare takento be
exogenous.In a completelydynamicmodeltheallocationof invest-
mentby sectorof originand sectorof destinationwould be endog-
enous. Our macro-econometric model incorporatesthe dynamics POLICIES FOR ENERGY
EQUILIBRIUM / 471

of savingand investment onlyin theprojectionof totalinvestment.
The allocationof capital by sectorof destinationis endogenously
determined, but the allocationof investmentby sectorof originis
exogenous.
The finalstep in determining finaldemand for the domestic
availabilityof the outputof each sectorincluded in our interin-
dustrymodel is to allocate personal consumptionexpenditures
amongthe productsof the nine sectorsincludedin the model and
expenditureson noncompetitive importsand the servicesof con-
sumers'durables,which are not includedamong the productsof
theninesectors.For thispurposewe employan econometricmodel
of consumerbehavior.This model is based on an indirectutility
functionthatcan be represented in theform:"I
lnV_-lnV
In.
( P1 P2 Pll \
, (10)
PC'C PC'rcC PC"C
P1 is thepriceof theIth commodity,

whereV is thelevel of utility,
and PC: C is total personalconsumptionexpenditures.There are
eleven commoditygroupsincludedin our model of consumerbe-
havior: one foreach of the nineindustrialsectors,excludingcrude
petroleumand naturalgas, and one each for housing,servicesof
consumers'durables,and noncompetitive imports.
For each commoditygroup we take the budget share to be
fixed.This assumptioncorrespondsto a linearlogarithmic indirect
utilityfunction.The quantitydemanded for each of the eleven
commoditygroupsincludedin our model of consumerbehavioris
a functionof thepricesof thecorresponding commoditygroupand
thelevel of totalpersonalconsumptionexpenditures. We determine
thelevel of totalpersonalconsumptionexpenditures in our macro-
econometricmodel. We determinethe prices of domesticavail-
abilityof the outputof each sectorin the interindustrymodel from
our modelsof producerbehavior.Given totalexpenditures and the
prices,we can determinethe quantitiesdemandedof the outputof
each sectorof the model for personalconsumptionexpenditures.
Final demand for all nine industrialsectorsincluded in our
interindustry model is the sum of finaldemandsforpersonalcon-
sumptionexpenditures, grossprivatedomesticinvestment, govern-
ment expenditures,and exports.We add personal consumption
expenditures fortheoutputof communications, trade,and services,
less housing,to personalconsumptionexpendituresforhousingto
obtain personal consumptionexpenditureson communications,
trade, and services.Otherwise,there is a direct correspondence
betweencommodity groupsin our modelof consumerbehaviorand
the sectorsincluded in our interindustry model. Given all final
demands,the pricesof domesticavailabilityof the outputof each
sectorand thematrixof input-output we can determine
coefficients,
thematrixofinterindustry transactionsin bothcurrentand constant
prices.
The equationsrepresenting the balance of demand and supply
foreach of the nineindustrialsectorsincludedin our interindustry
EDWARD A. HUDSON AND 11 For a detaileddiscussionof the indirect see Christen-

utilityfunction,
472 / DALE W. JORGENSON sen,Jorgenson, and Lau [19].

model can be presentedin the form:
9
XJ Z xiJ + Yi,
J==1
9 (1
A2AIP"XJ + CI + II + GI + ZI, (I -1, 2 . .. 9).

J=1
The input-output coefficients
{AIJ} are determinedtogetherwith
the prices of domesticavailabilityof the outputof each industry
{PI}. Givenpricesand thelevel of aggregatepersonalconsumption
expenditures, thelevelsof personalconsumption expenditures{Cl}
are determined.The remainingcomponentsof finaldemand {II,
GI, ZI) are projectedby industryof origin.These projectionsare
consistentwithlevels of grossprivatedomesticinvestment, govern-
mentexpenditures and exportsfromour macro-econometric model.
In matrixformthe demand and supplybalance equation for
the model can be representedas:
x Ax+y, (12)
wherex and y are vectorsof outputsand finaldemands:
X2 Y2
* y2
X9 Y9
and A is the matrixof input-output
coefficients:
All1 A12 ... A19
A21 A22 ... A29
A91 A92 ... A99

Levels of domesticavailabilityof the outputof each vector are
obtainedby solvingthis systemof equations:
x (I -A)-ly. (13)
importsare
Levels of capitaland labor servicesand competitive
determinedfromthe levels of domesticavailabilityand the cor-
respondinginput-output coefficients:
KI AKI: XI,
LI ALI*XI, ( 14)
RI ARPIXI,
(I =_ 1, 2 . .. 9) .
The input-outputcoefficients for capital and labor services and
competitiveimportsare functionsof the prices of the outputsof
the nine sectorsincludedin our interindustry model,the prices of
capital and labor servicesand the prices of competitiveimports
forthe fournonenergysectorsof the model. Our completeecono-
metricmodelforinterindustry transactions is presentedin diagram- POLICIES FOR ENERGY
maticformin Figure2. EQUILIBRIUM / 473

FIGURE2
INTERINDUSTRYECONOMETRICMODEL: DIAGRAMMATICREPRESENTATION
PRIMARYPRICES
PRICESOF IMPORTS,
CAPITAL,
LABORFROMMACROMODEL.
PRODUCTION
MODELS
__ _ _ __ _ _PRICE POSSIBILITYFRONTIER
FOREACHOF THE
PRODUCTIONEFFICIENCY NINEPRODUCING
SECTORS.
LEVELOF INPUTTO OUTPUT
EFFICIENCY
FOREACHSECTOR.
PRICEDETERMINATION INPUT-OUTPUTCOEFFICIENTS
SIMULTANEOUS
SOLUTIONOF PRICE LOGARITHMICPARTIAL
DERIVATIVESOF PRICE
FRONTIERS
GIVESTHENINESECTORALOUTPUT FRONTIERS,EVALUATED
AT EQUILIBRIUMPRICES,
PRICES. GIVEINPUTSHARESFOREACHSECTOR.THESE
SHARES,AGAINWITHPRICES,GIVETHE12 x 9
ARRAY OF INPUT-OUTPUT
COEFFICIENTS.
TOTALEXPENDITURES _ CONSUMPTIONMODEL
TOTAL
VALUESOFEXPENDITURE
OFPERSONAL REALCONSUMPTIONDEMAND
FOREACH
CONSUMPTION,
INVESTMENT,
GOVERNMENT SECTOR'SOUTPUT
PURCHASES
FROMMACRO MODEL.
INVESTMENTGOVERNMN
- ~~~PROPORTIONATE
SPLIT OF INVESTMENTSPENDING
INTODEMAND
FOREACHSECTOR'SOUTPUT.
EXPORTS PROPORTIONATE
SPLITOF GOVERNMENT
PURCHASES
VALUEOF EXPORTS
FROMEACHSECTOR. INTODEMAND
FOREACHSECTOR'SOUTPUT.
FINALDEMAND
TOTALREALFINALDEMAND
FOREACHSECTOR'S
OUTPUT.
INPUT-OUTPUTMODEL
(1) SOLVEFORTOTALOUTPUTFROMEACH
SECTORGIVENINPUTOUTPUT
COEFFICIENTS
ANDREALFINALDEMAND.
(2) SOLVE FOR REAL INTERINDUSTRY
AND l
PRIMARY
TRANSACTIONS
FROMSECTOR ENERGYDATA
OUTPUTS COEFFICIENTS.
ANDINPUT-OUTPUT BASEYEARFUELPRICES,HiSTORICAL
PHYSICAL
UNITSTO CONSTANTDOLLARRATIOS,
BTUTO CONSTANT
HISTORICAL DOLLARRATIOS.
TRANSACTIONS,
PRICES ENERGY FLOWS
FORMTRANSACTIONS
MATRIXIN CURRENT (1) FROMREALTRANSACTIONSDETERMINE
ENERGY
DOLLARS,
CONSTANT ANDPRICEINDICES.
DOLLARS
L FLOWSINBTU'SANDPHYSICALUNITS.
(2) FROMPRICEINDICESDETERMINE
FUELPRICES.
3. Producer behavior * Our interindustrymodel includeseconometricmodels of pro-

ducer behaviorfor each of the nine industrialsectorsincludedin
the model.12 In implementingan econometricmiodelof producer
behaviorfor each sector our primaryobjectiveis to explore the
EDWARD A. HUDSON AND
474 / DALE W. JORGENSON [5].
12 This Sectionis based on Berndtand Jorgenson

betweenrelativedemandforenergyand relative
interrelationships
demandforcapital services,labor services,and nonenergyinputs.
Similarly,we wish to explorethe interrelationships
among relative
demandsforthe fivetypesof energyincludedin our model-coal,
crudepetroleumand naturalgas, refinedpetroleumproducts,elec-
tricity,and gas as a productof gas utilities.We have imposed a
structureon the price possibilityfrontierthat permitsus to deal
withrelativedemand forenergyas a whole and relativedemands
forthe fivetypesof energyincludedin our model as two separate
problems.
To constructa model of the interrelationship of relativede-
mands for energy,capital services,labor services,and nonenergy
inputs,we firstdefinegroupsof inputsthat are aggregatesof the
twelveinputsincluded in our model of interindustry production
structure.These commodity groupsare:
(1) Capital (K).
(2) Labor (L).
(3) Energy (E). This group consistsof inputsof coal, crude
petroleumand naturalgas, refinedpetroleumproducts,electricity,
and gas as a productof gas utilities.
(4) Materials (M). This groupconsistsof inputsof agriculture,
manufacturing, transportation,communications,
trade,and services,
and competitiveimportsforthe nonenergysectors.
We firstconstructa model for producerbehaviorin termsof
thefouraggregates--capital, labor,energy,and materials.We repre-
sentthe priceof domesticavailabilityof the outputof each sector
as a functionof the prices of each of the aggregates.A sufficient
conditionfor the price possibilityfrontierto be definedon the
prices of the four aggregatesis that the overall price possibility
frontieris separable and homogeneousin the inputswithineach
aggregate.)3The price possibilityfrontieris separable in the com-
moditieswithinan aggregateif and onlyif the ratioof the relative
sharesof any two commoditieswithinan aggregateis independent
of thepricesof commoditiesoutsidethe aggregate.14 For example,
the fivetypesof energymake up an appropriateaggregateif the
relativevalue sharesof any two typesof energydependonlyon the
prices of energyand not on the pricesof nonenergyintermediate
inputsor thepricesof capital and labor services.
The second step in constructinga model of producerbehavior
is to representthe price possibilityfrontierfor the energyand
materialsaggregatesas functionsof the pricesof inputsthatmake
up each of the aggregates.For the energyaggregatethe price of
energyis represented as a functionof thepricesof the fivetypesof
energythat make up the aggregate-coal, crude petroleumand
naturalgas, refinedpetroleumproducts,electricity, and gas as a
productof gas utilities.For the materialsaggregatethe price of
materialsis representedas a functionof the fivetypesof inputs
thatmakeup theaggregate-agriculture, manufacturing, transporta-
tion,communications, trade,and services,and competitiveimports
forthe nonenergysectors.
1-3See Christensen, and Lau [18],pp. 29--32.
Jorgenson, POLICIES FOR ENERGY
14 See Leontief[29]. EQUILIBRIUM / 475

D Econometricspecification. The system of relative demand
functions employedin our econometricmodelof producerbehavior
for each of the nine industrialsectorsof our model is generated
fromthepricepossibilityfrontier forthe corresponding sector.For
each of the threesubmodelsthatmake up our model of producer
behaviorwe representthe price possibilityfrontierby a function
thatis quadraticin the logarithmsof the pricesof the inputsinto
the sector.The resultingprice possibilityfrontierprovidesa local
second-orderapproximationto any price possibilityfrontier.We
referto our representation as the transcendentallogarithmicprice
possibilityfrontieror, more simply,the translogprice possibility
frontier.The price possibilityfrontieris a transcendentalfunction
of the logarithmsof the pricesof inputs.The translogprice possi-
bilityfrontier
was introducedby Christensen, Jorgenson,and Lau.15
As an example,the price possibilityfrontier for the aggregate
(KLEM) submodeltakestheform:
ln AI + ln P1 c=Ka + a' ln PK + aIln PL + a-'jInPE
1
+ a' in31PM + - [K ()n PK) 2 + kKI lnPK In+(PL + J, (15)
~2 i/3,.(K PK)+/L
wherePK is the price of capital services,PL the price of labor
services,PE the price of energy,and PM the price of materials.
the equationsforthe
For thisformof the pricepossibilityfrontier,
relativesharesof thefourinputaggregatestake the form:
PK KI
PI*XI
+I3I
aQ 1n + + /3I3ln PL + 1?Eln PE + IKMll,n
PM,
PL*LI
PI*XI
a' + PI In PK + /3?In PL + /' In PE + PI ln PM,
PE iEI
=+ PIK I (16)
E
of 8
E RnPK + 13ELln PL ? /3BE1n PE + E3i,ln PM,
PM*MI
PI%xI
f + /3i,,,lnPK + 3I,1lnPL + 83I InPE + 3,,I lnPM,
(I 1, 2 ... 9),
whereKI is thequantityof capitalservicesin theIth sector,LI the
quantityof labor services,El the quantityof energyinput,and MI
the quantityof materialsinput.16
The dependentvariablein each of the fourfunctionsgenerated
fromthe translogprice possibilityfrontier is the relativeshare of
the corresponding input.To derivethe input-output coefficient
for
thatinput,we dividethe relativeshareby the ratioof the price of
the inputto the priceof the outputof the sector.For example,the
and Lau [17].

Jorgenson,
15 See Christensen,
based on thetranslog
16 A KLEM modelfortotalU. S. manufacturing
frontier
pricepossibility has beendevelopedby Berndtand Wood [6]. Berndt
and Christensen [2, 3, 4] have developedmodelsof capital-laborsubstitution
EDWARD A. HUDSON AND forU. S. manufacturing based on thetranslogproductionfunction,whichis
476 / DALE W. JORGENSON dual to the translogpricepossibility frontier.

input-output for capital servicesare:
coefficients
XI = (a + /i IlnPK + 8Iln PL
+ PI?ln PE + PI In PM)/(PK/PI), (I 1,2 ... 9).
Similarexpressionscan be obtainedfortheinput-output coefficients
forlabor services,energy,and materials.
The value of domesticavailabilityof the outputof each sector
is equal to the sum of the values of capital and labor servicesin
thatsectorand the value of energyand nonenergyinputsinto the
sector:
PIXXl PK*KI + PL:LI + PE;EI + PM*MI, (17)
(I 1,-2.. 9).
Giventhisaccountingidentity,therelativesharesof thefouraggre-
gate inputsinto each sectoradd to unity.The parametersof the
fourrelativedemand functionsfor capital and labor servicesand
energyand nonenergyinputsmustsatisfythe restrictions:
al + aL + aI +aoj 1,
1I3K+ PLI + IE- + AIr 0,
laIL + ?1, + ?IEl + PIlIL 0 (18)

18 E + 13IE + 18I, + 05
18IL
I?K11 + PL 1 + PEN + 31j113 0,
(I 1- 2 9).
Given estimatesof the parametersof any threeequationsfor the
relativeshares,estimatesof the parametersof the fourthequation
can be determinedfromtheserestrictions.
The logarithmof thepricepossibility foreach sectoris
frontier
twicedifferentiablein thelogarithmsof thepricesof inputs,so that
theHessian of thisfunctionis symmetric. This givesrise to a set of
restrictionsrelatingthe parametersof crosspartialderivatives.For
the aggregate(KLEM) submodelthree of these restrictions are
explicitin the threeequationswe estimatedirectly,namely:
13KL PLIK'
9.1
:= PI (19)
r
-
3LE
AI J,1 /EL
E1
5
(I-1, 2 ... 9).

In addition,we estimatethe parameters I PIL and PME (I-
1, 2 ... 9) fromthe equations:
1?IK -tPKK PLK PEKI
P311 -KL PLL PTELIT
laME PP
K- ]1 P IE'
(I 1,- 2 ...9),
so that threeadditionalsymmetry are implicitin the
restrictions
equationswe estimate,namely:
II _
AI
POLICIES FOR ENERGY

(l 1, 2 ... 9). EQUILIBRIUM / 477

For each of the nine industrialsectors,the aggregate(KLEM)
submodelinvolvessix symmetry restrictions.
The price possibilityfrontierfor each sector is homogeneous
of degreeone; proportional changesin thepricesof all inputsresult
in a proportionalchangein thepriceof output.Homogeneityof the
price possibilityfrontieris implied by the symmetry restrictions
outlined above and the restrictionsimplied by the accounting
identitybetweenthe value of outputand the value of input,.In the
absence of the symmetry restrictions
and the restrictionsimplied
by the accountingidentitybetweenthe value of output and the
value of input,the aggregate(KLEM) submodelinvolvestwenty
unknownparameters.Taking these restrictions into account, we
reducethe numberof unknownparametersto nine.
We have presentedthe aggregate(KLEM) submodelof our
modelof producerbehaviorin detail.The formsof theenergy(E)
and materials(M) submodelsare analogous to the formof the
aggregatesubmodel.For the energysubmodelwe can writethe
translogprice possibilityfrontier
in the form:
lnPE-aEI aE-I In PE1 + aEIln PE2 + ac <' ln PE3
+ a-'I -nPE4 + a-EIIn PE5 (21)
+ 2[/EI (ln PE1 ) 2 +
EI
I lnPE1 lnPE2 +
2 111
(Il 1, 2. ... 9),
wherePE1 is the price of coal, PE2 the price of crude petroleum
and naturalgas, PE3 theprice of refinedpetroleumproducts,PE4
the price of electricity,
and PE5 the price of gas as a productof
gas utilities.Similarly,we can writethe translogprice possibility
frontierforthe materialssubmodelin theform:
lnPM < 0+
amI aMI
1
InPM1 + am,I'lnPM2 + all" lnPM3
2
+ a-,"'In PM4 + acII In PM5 (22)

+ 2 e (In PM1I)2+Eln12 PM1 ln PM2 + J.,
2
(I -1 , 2 . .. 9 ),
wherePM1 is the price of agriculture, nonfuelmining,and con-
struction,PM2 the price of manufacturing, excludingpetroleum
refining,PM3 the price of transportation, PM4 the price of com-
munications, trade,and services,and PM5 the price of competitive
imports.
For both energy(E) and materials(M) submodelswe can
derivea systemof fiveequationsfordetermining the relativeshares
of the five commoditygroups makingup each submodel. Each
equation gives the relativeshare of one of the commoditygroups
as a functionof the prices of all fivegroupsincludedin the sub-
model. We can derive the relative demand functionsfor each
commoditygroupby dividingthe relativevalue shareof the group
by the ratio of the price of that group to the price of the corre-
spondingaggregate.For example, to derive the demand for coal
relativeto totalenergywe dividethe relativevalue shareof coal by
EDWARD A, HUDSON AND the ratioof the price of coal to the price of total energy.We can
478 / DALE W. JORGENSON derive the input-outputcoefficientfor coal by multiplyingthe

demandforcoal relativeto totalenergyby the demandforenergy
relativeto the outputof the corresponding industrialsector.
The value of each aggregateis equal to the sum of the values
of thecommodity groupsthatmakeup thataggregate.For example,
thevalue of energyis equal to thesum of thevaluesof thefivetypes
of energy:
PEEEI -PEI ElI + PE2 'E2I + PE3 -E31
+ PE4'E4I + PE5 E51, (23)
(I -- 1 2 . . 9),
whereElI is the quantityof coal, E2I the quantityof crudepetro-
leum and naturalgas, E31 the quantityof refinedpetroleumprod-
ucts, E41 the quantityof electricity,
and E51 the quantityof gas
as a productof gas utilities.As before,the relativeshares of the
fiveenergyinputsadd to unity,so thatthe parametersof the five
relativedemandfunctionsfortheseinputsmustsatisfyrestrictions
analogousto the restrictionsgivenabove forthe parametersof the
aggregate(KLEM) submodel. Similar restrictions hold for the
fiverelativedemand functionsfornonenergyinputs.
D Parameterestimation.For each of the nine industrialsectors

includedin our interindustrymodel of theproductionstructure the
aggregate(KLEM) submodelconsistsof four equations. We fit
the threeequationsfor relativesharesof capital (K), labor (L),
and energy(E). The relativesharesof materials(M) can be deter-
iniiiedfrom these three equations and the accountingidentity
betweenthe value of outputand the value of input.Taking into
account the symmetry on the parametersof the three
restrictions
equations of the aggregate(KLEM) submodel,the numberof
unknownparametersto be estimatedis reduced to nine. Taking
convexityrestrictionsinto account where appropriate,we further
reduce the numberof unknownparameters.17
For fourof the industrialsectorsincludedin our interindustry
model the energy(E) submodelconsistsof fiveequationsforthe
relativeshares of coal, crude petroleumand naturalgas, refined
petroleuinproducts,electricity,
and gas as a productof gas utilities.
These foursectorsare:
(1) n-onfuel
agriculture, mining,and construction
(2) manufacturing, petroleumrefining
excludirng
(4) communication,trade,and services
(7) petroleumrefining.
For these industrialsectorswe fitthe four equations for relative
sharesof coal, crudepetroleumand naturalgas, refinedpetroleum
products,and electricity.The relativeshareof gas as a productof
gas utilitiescan be determinedfromthese fourequationsand the
accountingideritity betweenthe totalvalue of energyand the sum
of thevalues of thefivetypesof energy.
For thefourindustrialsectorslistedabove theenergy(E) sub-
model involvessix symmetry in the fourequationswe
restrictions
17 Methodsfor imposingconvexity
restrictions
have been developedby POLICIES FOR ENERGY
Lau [28]. EQUILIBRIUM / 479

estimatedirectlyand fouradditionalrestrictions that are implicit
in theseequationsand the accountingidentity forthetotalvalue of
energy.In the absence of these restrictions and the restrictions
impliedby the accountingidentity,the energy(E) submodelfor
the four industrialsectorsinvolvesunknownparameters.Taking
theserestrictions into account,we reducethe numberof unknown
parametersto fourteen.
For fourof the industrialsectorsincludedin our interindustry
model the energy (E) submodel consistsof four equations for
relativeshares of four types of energy.For transportation, coal
mining,and electricutilitiesthe relativeshare of crude petroleum
and naturalgas is zero. For gas utilitiesthe relativeshare of elec-
tricityis zero. For thesefoursectorsthe formof the energy(E)
submodelis analogousto the formof the aggregate(KLEM) sub-
model. We fitthreeequationsforthe relativesharesof threetypes
of energy,excludingthe equationforthe relativeshareof gas as a
productof gas utilities.The relativeshareof gas can be determined
fromthe accountingidentityfor the total value of energy.We fit
these threeequationssubjectto symmetry restrictions so that the
numberof unknownparametersis reducedto nine.
For the crude petroleumand naturalgas sectorof our inter-
industry modeltheenergy(E) submodelconsistsof threeequations
for relativeshares of three types of energy.For this sector the
relativesharesof coal and gas as an outputof gas utilitiesare equal
to zero. We fit two equations for the relative shares of crude
petroleumand natural gas and refinedpetroleumproducts.The
relativeshareof electricitycan be determinedfromthe accounting
identity forthetotalvalue of energy.Fittingtheseequationssubject
to symmetry restrictions,we reducethenumberof unknownparam-
etersto five.
For the four nonenergysectorsincludedin our interindustry
modelthematerials(M) submodelconsistsof fiveequationsforthe
relativesharesof agriculture, manufacturing, transportation, com-
munications,and competitiveimports.For the fiveenergysectors
the materialssubmodelconsistsof-fourequationsfor the relative
sharesof agriculture, manufacturing, transportation,and communi-
cations.The formof thematerials(M) submodelforthefournon-
energysectorsis analogous to the formof the energy(E) sub-
model withfiveequationsfor the relativeshares of fivetypesof
energy.For thesesectorswe fitfourequationsfortherelativeshares
of nonenergyinputs,excludingcompetitiveimports.The relative
sharesof competitiveimportscan be determinedfromthese four
equations and the accountingidentitybetweenthe total value of
materialsand the sum of the values of the fivetypesof nonenergy
inputs.Each of these submodelsinvolvesfourteenunknownpa-
rameters.
For the fivenonenergysectorswe fitthreeequations for the
relativesharesof nonenergy inputs,excludinginputsof communica-
tions,trade,and services.The materials(M) submodelsforthese
sectors are analogous to the aggregate(KLEM) submodel and
involvenineunknownparameters.
EDWARD A. HUDSON AND For each of the nine industrialsectorsincludedin our inter-
480 / DALE W. JORGENSON industrymodel of production all three submodels-aggregate

(KLEM), energy(E), and materials(M) -have been fittedto
annualdata on interindustry transactions,
capitaland labor services,
and competitive importsfortheperiod1947 to 1971.18 Our method
to estimationis the minimumdistance estimatorfor nonlinear
simultaneousequations,treatingthe prices of competitiveimports
as exogenousvariables'9For each of thesesubmodelsthe systemof
equationsis nonlinearin thevariablesbut linearin the parameters.
In Tables 1, 2, and 3 we presentestimatesof theparametersof
the translogprice possibilityfrontierfor each of the three sub-
modelsof our econometricmodelof producerbehaviorforall nine
industrialsectors.For convenienceof the readerwe list again the
ninesectors:
(1 ) agriculture, nonfuelmining,and construction
(2) manufacturing, excludingpetroleumrefining
(3) transportation
(4) communications, trade,and services
(5) coal mining
(6) crudepetroleumand naturalgas
(7) petroleumrefining
(8) electricutilities
(9) gas utilities.
Table I containsestimatesof the parametersof the translog
TABLE 1
ESTIMATESOF THE PARAMETERSOF THE TRANSLOGPRICE POSSIBILITYFRONTIERFOR
THE AGGREGATE(KLEM) SUBMODEL FOR NINE INDUSTRIALSECTORS OF THE U.S.
ECONOMY,1947-1971
SECTORS
PARAMETER 1 2 3 4 5 6 7 8 9
a I 0.1785 0.1149 0.1799 0.2994 0.1277 0.4272 0.1373 0.3458 0.2165
K
aL 0.2354 0.2940 0.4096 0.4171 0.4139 0.0987 0.0978 0.1925 0.1085
a I 0.0244 0.0202 0.0380 0.0182 0.1857 0.1101 0.4553 0.2120 0.5547

E
aI 0.5616 0.5708 0.3726 0.2653 0.2727 0.3640 0.3096 0.2496 0.1204
AIKK 0.0851 0.0590 0.1018 0.0595 0.0280 0.2447 0.0849 0.1330 0.0749
IK
KL -0.0366 0.0030 -0.0601 0.0114 -0.0357 -0.0422 .-0.0242 0.0288 -0.1181
I | -0.0052 -0.0055 -0.0137 0.0011 0.0099 -0.0470 -0.0772 -0.1682 -0.0941

KE
lAKM -00434 -0.0565 -0.0280 -0.0719 -0.0022 -0.1555 0.0165 0.0064 0.1373
lAL
LL 0.0287 0.0737 0.0582 0.0848 -0.0751 -0.0131 -0.0174 -0.0968 -0.2773
I
lALE 0.0023 0.0054 0.0180 0.0098 0.1145 0.0459 -0.0122 0.0239 0.1318
I 0 0056 -0.0821 0.0199 -0.1059 -0.0037 0.0093 0.0538 0.0441 0.2636
laLM
A I | 0.0072 0.0188 0.0198 0.0020 0.0087 0.0184 0.2282 0.0638 0.1413

EE
M
EM -0|0044 -0.0187 0.0119 -0.0129 -0.1332 -0.0173 -0.1388 0.0805 -0.1790
1M 0.0422 0.1573 -0.0038 0.1907 0.1392 0.1635 0.0685 -0.1311 -0.2219
18 These data werecompiledbyJackFaucettAssociates[21].

19The minimum distanceestimator
fornonlinearsimultaneous
equations POLICIES FOR ENERGY
is discussedbyMalinvaud[32],pp. 325-373. EQUILIBRIUM / 481

pricepossibilityfrontierforthe aggregatesubmodel.The aggregate
price possibilityfrontieris definedon the prices of capital (K),
labor (L), energy(E), and materials(M). For each of the nine
industrialsectorsthe parametersof the aggregatesubmodel are
estimatedfroma systemof threeequations. The dependentvari-
ables in these equations are the relativeshares of capital, labor,
and energyin thevalue of totaloutput.Parametersin the equation
fortherelativeshareof materialsare estimatedfromtherestrictions
impliedby theaccountingidentity betweenthevalue of outputand
the value of input. We employ constraintsacross the equations
arisingfromsymmetry restrictionson the price possibilityfrontier
foreach sector,reducingthenumberof parametersto be estimated
to nine. We also employconvexityrestrictions where appropriate
to further reducethe numberof parametersto be estimated.
Table 2 containsestimatesof the parametersof the translog
pricepossibilityfrontierforthe energy(E) submodel.The energy
price possibilityfrontiergives the price of energyfor each sector
as a functionof the pricesof fivetypesof energyinputs.The five
typesof energyare:
(1) coal
(2) crudepetroleum. and naturalgas
(3) refinedpetroleumproducts
(4) electricity
(5) gas as a productofgas utilities.
For each of thenineindustrialsectorstheparametersof the energy

submodelare estimatedfroma systemcontainingas manyas four
equations. The dependentvariables in these equations are the
relativesharesof each typeof energyin the total value of energy.
We employ the restrictionsinmplied by the accountingidentity
betweenthe totalvalue of energyand the sum of the values of all
typesof energy,the synmmetry and, whereappropnate,
restrictions,
convexityrestrictionsin reducingthe nunmber of parametersto be
estimated.
Finally,Table 3 containsestimatesof the parametersof the
forthe materials(M) submodel.
translogprice possibilityfrontier
For the fournonenergysectorsthe materialspricepossibilityfron-
tieris definedon the pricesof the fivetypesof notlenergy itnputs.
These are:
(1) nonfuelmining,and construction

agriculture,
(2) manufactaring,
excludingpetroleumrefining
(3) transportation
(4) communications,trade,and services
(5) competitiveimports.
is
For the fiveenergysectorsthe materialspricepossibilityfrontier
definedon the pricesof fourtypesof nonenergyinputs,excluding
competitive imports.The dependentvariablesare relativesharesof
each typeofnonenergy input.We employrestrictionson theparam-
EDWARD A. HUDSON AND used for the energy
eters that are analogous to the restrictions
482 / DALE W. JORGENSON submodel.

TABLE 2
ESTIMATES OF THE PARAMETERS OF THE TRANSLOG PRICE POSSIBLITY FRONTIER FOR

THE ENERGY (E) SUBMODEL FOR NINE INDUSTRIAL SECTORS OF THE U.S.ECONOMY, 1947-1971
SECTORS
PARAMETER 1 2 3 4 5 6 7 8 9
aEl 0.0053 0.2040 0.0799 0.1142 0.8510 0.0738 0.0448 0.3165 0.0909
a EI 0.0021 0.0002 0.0000 0.0111 0.0000 0.1464 0.2131 0.0000 0.1408
2
a EI 0.8389 0.3384 0.8107 0.3520 0.3997 0.0894 0.2289 0.1173 0.0940
3
a EI 0.1212 0.2858 0.0406 0.4136 0.1062 0.6904 0.5132 0.3829 0.6743
4
a EI 0.0325 0.1716 0.0688 0.1091 0.0029 0.0000 0.0000 0.1829 0.0000
5
l
1E 0.0052 0.1624 0.0735 0.1011 -0.0118 -0.0557 -0.0165 0.0762 -0.0752
, EI 0.0000 0.0000 0.0000 -0.0013 0.0000 0.1098 0.0483 0.0000 0.1850
1i2
EI
13 -0.0068 -0.0690 -0.0648 -0.0402 0.0220 -0.0255 0.0005 0.0833 -0.0192
: EI 0.0011 -0.0583 -0.0032 -0.0472 -0.0100 -0.0286 -0.0323 -0.0578 -0.0906
E4
1EI 0.0005 -0.0350 -0.0055 -0.0125 -0.0002 0.0000 0.0000 -0.1017 0.0000
la22 .0.0010 -0.0029 0.0000 0.0110 0.0000 0.0077 0.1113 0.0000 -0.1416
E
23 0.0007 -0.0001 0.0000 -0.0039 0.0000 0.0053 -0.0592 0.0000 0.0455
E3
E24 -0.0007 0.0073 0.0000 -0.0046 0.0000 -0.1228 -0.1003 0.0000 -0.0889
: EI -0.0010 -0.0043 0.0000 -0.0012 0.0000 0.0000 0.0000 0.0000 0.0000
~25
3 EI -0.0252 0.2239 0.1534 0.2281 -0.0287 -0.0418 0.0680 0.0001 -0.0553
E3
3 34 0.0128 -0.0967 -0.0329 -0.1456 0.0064 0.0620 -0.0092 -0.0966 0.0289
E4
3 35E 0.1854 -0.0581 -0.0557 -0.0384 0.0003 0.0000 0.0000 0.0162 0.0000
E5
/344 -0.0410 0.1868 0.0389 0.2425 0.0055 0.0894 0.1418 0.2077 0.1505
E4
a 45 0.0278 -0.0390 -0.0028 -0.0451 -0.0019 0.0000 0.0000 -0.0502 0.0000
4E
-aEI 0.0458 0.1364 0.0640 0.0972 0.0018 0.0000 0.0000 0.1357 0.0000
* The second componentof our frameworkfor energypolicy 4. Growth model

analysisis a model of long-termU. S. economicgrowth.A model
of U. S. economic growthis requiredto provide totals for con-
sumption,investment, government and exportfinaldemandin olur
econometricmodel of interindustry transactions.For thispurpose
conventionaleconometricmodels could be used as an alternative
to our macro-econometric growthmodel.However,a growthmodel
is also requiredto providethe relativepricesof capital and labor
services,whichenteras primaryinputsintothe nine sectorsof our
interindustry model. Prices of primaryinputsmust be generated
within a framework thatalso incorporatesprimaryinputquantities
and the pricesand quantitiesof finalproducts.For thispurpose a
new approachto macro-econometric model-building is required.
Our approachto the explanationof economicgrowthis closely
relatedto theneoclassicaltheoryof economicgrowth.20 The build
POLICIES FOR ENERGY
20 See, forexaimple, growth
the discussionof the neoclassicaltwo-sector EQUILIBRIUM / 483

TABLE 3
ESTIMATES OF THE PARAMETERS OF THE TRANSLOG PRICE POSSIBILITY FRONTIER FOR

THE MATERIALS (M) SUBMODEL FOR NINE INDUSTRIAL SECTORS OF THE U.S. ECONOMY, 1947-1971
SECTORS
PARAMETER 1 2 3 4 5 6 7 8 9
MI 0.2578 0.1348 0.1221 0.0819 0.0193 0.0779 0.0562 0.1134 0.1759
MI
|0.3777 0.5933 0.1373 0.2548 0.4270 0.0869 0.1656 0.1046 0.1546
MI 0.0653 0.0472 0.1932 0.0532 0.0675 0.0501 0.1736 0.1200 0.1453
.3
aMI 0.2674 0.1643 0.4382 0.5774 0.4839 0.5517 0.4659 0.6620 0.4426
4
5MI
S 0.0318 0.0603 0.1091 0.0327 0.0023 0.2334 0.1388 0.0000 0.0815
MI
| 0.0799 0.0376 0.1072 -0.0454 0.0190 0.0718 0.0530 0.0170 -0.0407
1MI -0.1012 -0.0200 -0.0168 9.0848 -0.0083 -0.0068 -0.0093 0.0755 0.0845
A3MIr | 0.0629 0.0043 -0.2360 -0.0094 -0.0013 -0.0039 -0.0097 -0.0292 -0.0703
13
MI -0.0672 -0.0571 -0.0535 -0.0806 -0.0094 -0.0430 -0.0262 -0.0633 -0.0899
MI
0.0256 0.0352 -0.0133 0.0506 -0.0000 -0.0182 -0.0078 0.0000 0.1164
MI 0.2349 0.1958 0.1185 0.0973 0.2447 0.0794 0.1382 0.0023 -0.0070

22
MI
23 -0.0219 -0.0361 -0.0265 -0.0091 -0.0288 -0.0044 -0.0288 0.0037 -0.0123
MIr2 -0.1009 -0.0710 -0.0602 -0.1179 -0.2066 -0.0480 -0.0772 -0.0815 -0.0895
24
3 MI -0.0109 -0.0687 -0.0150 -0.0550 -0.0010 -0.0203 -0.0230 0.0000 0.0243
25
/3MI
33 0.0039 0.0435 0.1559 0.0502 0.0629 0.0476 0.1434 0.1027 0.1095
/3MI -0.0187 -0.0030 -0.0847 -0.0321 -0.0327 -0.0276 -0.0809 -0.0773 -0.0739
M4
MI
3 -0.0263 -0.0087 -0.0211 0.0005 -0.0002 -0.0117 -0.0241 0.0000 0.0471
M5
/34M 0.1959 0.1218 0.2462 0.2348 0.2497 0.2473 0.2488 0.2221 0.2346
M4
/3M4 -0.0090 0.0093 -0.0478 -0.0042 -0.0011 -0.1287 -0.0646 0.0000 0.0187
MI 0.1195 0.0000
| 0.0206 0.0329 0.0972 0.0081 0.0023 0.1789 -0.2065
ingblocksof our modelare submodelsof householdand production

sectorsand submodelsofforeignand government sectors.Economic
growthresultsfromthelinkbetweencurrentcapital formation and
futureproductivecapacity.In our model thislinkis providedby a
macro-econometric productionfunction,relatingtheoutputof con-
sumptionand investment goods to the input of capital and labor
services. Preferencesbetween present and futureconsumption,
whichdeterminethe allocationof incomebetweensavingand con-
sumption,completeour model of economicgrowth.
Our macro-econometric growthmodel of the U. S. economy
providesforthe simultaneousdetermination of the values of prod-
ucts and factorsof productionin both currentand constantprices.
The model links demand for capital formationby savers to the
modelby Burmeister giventhere.A more
and Dobell [7] and thereferences
EDWARD A. HUDSON AND detaileddiscussionof our modelis presentedin Hudsonand Jorgenson[25];
484 / DALE W. JORGENSON Berndt,Christensen,
see also, Jorgenson, and Hudson[26],Chapter2.

supplyof investment goodsby producers.Similarly,themodellinks
demand for consumptiongoods and supply of labor servicesby
householdsto supplyof consumptiongoods and demandforlabor
by producers.Finally,giventhesupplyof capitalstock,thedemand
forcapital servicesdeterminesthe overallrate of returnto capital.
The theoryof U. S. economicgrowththatunderliesour macro-
econometric growthmodelis a theoryof thebehaviorof theprivate
sector of the U. S. economy. The behavior of the foreignand
government sectorsis takento be exogenous.Demographictrends
-the growthof population,labor force,and unemployment-are
also exogenousto the model. The main determinant of growthin
productivity is capital formation.Growthin productivity over and
above growthdue to capital formationis exogenousto the model.
We have projecteddemographictrendsand trendsin productivity
growthon the basis of post-warexperiencein the UnitedStates.'
D Variables. Our econometricgrowthmodel is summarizedin

the followingseriesof tables. In Table 4 we presentour notation
forthe variablesthatappear in the model. The firstgroupof vari-
to another.
ables convertsaggregatesfromone basis of classification
For example,theindexof totalfactorproductivity A convertsinput
to output.The indexof A W convertsinvestment weightsforcapital
formation to theweightsappropriateforthemeasurement of wealth.
All of theaggregation variablesare takento be exogenous.
The second groupof variablesappearingin Table 4 comprises
the quantitiesof productsand factorsof production,brokendown
by sectorof originand destination.VariablesbeginningwithC are
quantitiesof consumption variablesbeginningwith
goods. Similarly,
I are quantitiesof investment goods. Variables beginningwithL
are quantitiesof labor services,while variablesbeginningwithK
are quantitiesof capital services.The thirdgroup of variablesin-
cludespricescorresponding to thequantitiesof productsand factors
of production.Each price begins with P and continueswith the
correspondingquantity.For example, the variable C is personal
consumptionexpendituresand the variablePC is the price of per-
sonal consumptionexpenditures.
The fourthgroup of variablesconsistsof financialvariables:
ratesof depreciationand replacement,the nominalrate of return,
grossprivatenationalsaving,and privatenationalwealth.Finally,
thefifth groupof variablescomprisestax and transfer variables.The
variableEL representsgovernmenttransferpaymentsto persons
other than social insurancefunds,an expenditurecategory.The
variablesbeginningwithT are tax rates.Each of the productsand
factorsincluded in the model-consumption goods, investment
goods, capital services,and labor services-is associated with an
effectivetax rate. The variable TP is the effectivetax rate for
capital stock.
CI Equations. In Table 5 we presentthe equationsforour macro-

econometricgrowthmodel. The model includes five behavioral
equations,describingthe behaviorof householdand businesssec-
POLICIES FOR ENERGY
21 Detailed projectionsare presentedby Hudson and Jorgenson
[25]. EQUILIBRIUM / 485

TABLE 4
MACRO-ECONOMIC GROWTH MODEL: NOTATION
1. AGGREGATION
VARIABLES
A TOTALFACTORPRODUCTIVITY
(INPUTTO OUTPUT). AK CAPITAL STOCK,LAGGEDTO CAPITALSERVICE.
ACI INVESTMENT
TO CHANGEINBUSINESSINVENTORIES, APC IMPLICIT
DEFLATOROFCONSUMPTION GOODSTO
CONSUMPTION
GOODS. IMPLICIT
DEFLATOROF CHANGE INBUSINESS
Al INVESTMENTTOCAPITALSTOCK. CONSUMPTION
INVENTORIES, GOODS.
AL INVESTMENTTO CAPITAL
STOCK,LAGGED. AW INVESTMENT TO WEALTH.
2. QUANTITIES
C PERSONALCONSUMPTIONEXPENDITURES,INCLUDING IG GOVERNMENT PURCHASES OF INVESTMENT GOODS.

OF CONSUMERS'
SERVICES DURABLES. IR NETEXPORTS OF INVESTMENT GOODS.
CE SUPPLYOFCONSUMPTIONGOODSBY GOVERNMENT IS SUPPLYOF INVESTMENT GOODSBY PRIVATE
ENTERPRISES. ENTERPRISES.
CG GOVERNMENT OFCONSUMPTION
PURCHASES GOODS. L SUPPLYOF LABOR SERVICES.
Cl CHANGEINBUSINESSINVENTORIES
OF LD PRIVATE PURCHASES OF LABOR SERVICES.
CONSUMPTIONGOODS. LGE GOVERNMENT ENTERPRISESPURCHASES OF
CR NETEXPORTS OFCONSUMPTIONGOODS,LESS INCOME LABORSERVICES.
ORIGINATING,
RESTOFTHEWORLD. LGGGENERAL GOVERNMENT PURCHASES OF LABORSERVICES.
GOODSBY PRIVATE
CS SUPPLYOF CONSUMPTION LH TIMEAVAILABLE.
ENTERPRISES. LJ LEISURETIME.
G NETCLAIMS ONGOVERNMENT. LR NETEXPORTS OF LABOR SERVICES.
R NETCLAIMS ONRESTOFTHEWORLD. LU UNEMPLOYMENT
I GROSSPRIVATE DOMESTIC
INVESTMENT,INCLUDING K CAPITAL STOCK.
PURCHASESOF CONSUMERS'DURABLES. KD CAPITALSERVICES.
3. PRICES
PC IMPLICIT
DEFLATOR,PERSONAL CONSUMPTIONEXPENDI-PIG IMPLICIT GOVERNMENT
DEFLATOR, PURCHASES
TURES,INCLUDINGSERVICESOFCONSUMERS'DURABLES. OF INVESTMENT GOODS.
PCE IMPLICIT
DEFLATOR,SUPPLYOF CONSUMPTIONGOODS PIR IMPLICIT DEFLATOR,NETEXPORTS OF INVESTMENTGOODS
BY GOVERNMENT ENTERPRISES. PIS IMPLICIT
DEFIATOR,SUPPLYOF INVESTMENT GOODS
PCG IMPLICIT
DEFLATOR,GOVERNMENT PURCHASES
OF BY PRIVATEENTERPRISES.
CONSUMPTION GOODS. PL IMPLICIT SUPPLYOF LABOR
DEFLATOR, SERVICES.
PCI IMPLICIT
DEFLATOR,CHANGE INBUSINESSINVENTORIESPLD IMPLICIT PRIVATE
DEFLATOR, PURCHASES OF
OF CONSUMPTIONGOODS. LABOR SERVICES.
PCR IMPLICIT
DEFLATOR,NETEXPORTS OFCONSUMPTION PLGEIMPLICIT GOVERNMENT
DEFLATOR, ENTERPRISES
GOODS,LESS INCOME RESTOFTHEWORLD.
ORIG'INATING, PURCHASES OF LABOR PURCHASES.
PCS IMPLICIT
DEFLATOR,SUPPLYOFCONSUMPTION GOODS PLGGIMPLICIT DEFLATOR,
GENERALGOVERNMENT PURCHASES
BY PRIVATEENTERPRISES. OFLABOR SERVICES.
PG IMPLICIT
DEFLATOR,NETCLAIMS ONGOVERNMENT. PLR IMPLICIT DEFLATOR,
NETEXPORTS OF LABOR SERVICES.
PR IMPLICIT
DEFLATOR,NETCLAIMS ONRESTOFTHEWORLD.PKD IMPLICIT CAPITAL
DEFLATOR, SERVICES.
Pi IMPLICIT
DEFLATOR,GROSSPRIVATE INVEST-
DOMESTIC
INCLUDING
MENT, PURCHASESOFCONSUMERS'DURABLES.
4. FINANCIAL
VARIABLES
D RATEOF DEPRECIATION,
PRIVATEDOMESTIC N NOMINALRATEOF RETURN,
PRIVATE
DOMESTIC
TANGIBLEASSETS. TANGIBLE
ASSETS.
M RATEOFREPLACEMENT,PRIVATE
DOMESTIC S GROSSPRIVATE
NATIONALSAVING.
TANGIBLEASSETS. W NATIONAL
PRIVATE WEALTH.
5. TAXANDTRANSFER
VARIABLES
EL GOVERNMENTTRANSFERPAYMENTS
TO PERSONS, TK EFFECTIVE
TAXRATE,CAPITAL
SERVICES.
OTHERTHANFROMSOCIALINSURANCE
FUNDS. TL EFFECTIVE
TAXRATE,LABORSERVICES.
TC EFFECTIVE
TAXRATE,CONSUMPTION
GOODS. TP EFFECTIVE
TAXRATE,CAPITAL
STOCK.
TI EFFECTIVE
TAXRATE,INVESTMENT
GOODS.
tors.22The demand for labor is determinedby the total level of

production,theamountof capitalservicesavailable,and therelative
22 Our modelof thehouseholdsectorwas originated by Christensen
and
EDWARD A. HUDSON AND Jorgenson by Christen-
[12]. Our modelof thebusinesssectorwas originated
486 / DALE W. JORGENSON sen,Jorgenson, and Lau [18].

TABLE 5
MACRO-ECONOMIC GROWTH MODEL: EQUATIONS
1. BEHAVIORAL
EQUATIONS
INVESTMENTSUPPLY:
PISISS =1.1717 - 0.5006* (LOGCS - LOGIS).
PKD*KD
LABORDEMAND;
PLD*LD~ 65
PKD*KD
PRODUCTION POSSIBILITY
FRONTIER:
0= - LOGKD-1.5655*LOGLD + 1.3938*LOGCS - 2.5655 LOGA
+ 1.1717* LOGIS + 0.2503* (LOGCS - LOGIS) 2.
CONSUMPTION DEMAND:
PC * C = 0.0034 W(-1)+ 0.1469* (PL * LH + EL).
LEISUREDEMAND:
PL * LJ=0.0196 W(-1)+ 0.8403* (PL *LH+ EL).
2. ACCOUNTING
IDENTITIES
CAPITAL
STOCKANDINVESTMENT:
K=AI* I + (1-M)*K(-1).
CAPITAL
SERVICEANDCAPITAL
STOCK:
KD = AK* K(-1).
VALUEOFOUTPUT ANDINPUT:
PIS* IS + PCS* CS = PKD* KD + PLD* LD.
VALUEOFCONSUMPTION GOODS:
(1 + TC) * PCS * CS + PCE* CE
= PC * C + PCG* CG+ PCI Cl + PCR* CR.
VALUEOF INVESTMENT GOODS:
(1 + TI) * PIS* IS + PCI* Cl PI * I + PIG* IG+ PIR IR.
VALUEOFCAPITAL SERVICES:
(1 - TK)* (PKD KD- TP * PI[-1]* AW[-1]* K[-1])
N * PI(-l) AW(-1)* K(-1)+ D * PI * AL* K(1)
+ PI(-l) * AW(-1)* K(-1)- PI * AL* K(-1).
VALUE
OFLABOR
SERVICES:
(1 - TL) * (PLD * LD + PLGE* LGE + PLGG* LGG+ PLR LR) = PL L.
SAVING:
S PI * I + PG * (G - G[-1]) + PR * (R - R[-1]).
WEALTH:
W = P *AW*K + PG*G + PR*R.
3. BALANCE
EQUATIONS
CONSUMPTION:
CS + CE = C + CG + Cl + CR.
INVESTMENT:
IS + Cl = I + IG + IR.
TIME:
LH L + LJ.
LABOR:
L LD + LGE + LGG+ LR + LU.
4. AGGREGATION
EQUATIONS
IMPLICIT
DEFLATOR,CHANGE
INBUSINESS CONSUMPTION
INVENTORIES, GOODS:
PCI = PC * APC.
CHANGE
INBUSINESS CONSUMPTION
INVENTORIES, GOODS:
PCI* Cl = PI * I * ACI.
pricesof capital and labor services.Outputof investment goods is

determinedby the price of investment goods, the pricesof capital POLICIES FOR ENERGY
servicesand theavailablesupplyof capitalservices,and theamount EQUILIBRIUM / 487

of productivecapacitybeing devoted to the outputof consumer
goods and services.The productionthat takes place in the U. S.
privatesector,whetherof consumptionor of investment goods, is
limitedby the totalproductivecapacity,whichin turndependson
available suppliesof capital and labor servicesas well as on the
level of technology.
The level of householdexpenditureon consumergoods and
servicesis determinedby the wealth and resourcesheld by the
householdsector,includingthe timeendowmentof the sector.The
desireda mountof workinputprovidedby the householdsectoris
determinedby the total amountof time available, the wage rate,
and the extentof otherresourcesavailable to the householdsector
in the formof wealthand transfer payments.
The behavioral equations of our macro-econometric growth
model have been estimatedfromhistoricaldata for the United
Statesfortheperiod 1929 to 1971.': In additionto the fivebehav-
ioral equations the model includes accounting identitiesfor
capita]stock,investment and capitalservices,forthevalue of input
and output,forsavingand wealth,and forthevalue of consumption
goods,investment goods, capital services,and labor services.These
accountingidentitiesincorporatethe budgetconstraints forhouse-
hold and businesssectorsand the flowof each productand factor
of productionin currentprices.
The modelis completedby balance betweendemandand supply
of productsand factorsof productionin constantprices and by
aggregationequations that determineinventoryaccumulationof
consumptiongoods. Althoughgrossprivatedomesticinvestment is
determined in themodel,theallocation of investment between fixed
investmentand inventoryaccumulationis not determinedin the
model. An allocationbetweeninventory accumulationin the form
of consumptiongoods and othercomponentsof grossprivatedo-
mesticinvestment is requiredforthebalance betweendemandand
supplyof consumptionand investment goods. In Figure 3 we out-
liinetheworkingof our macro-econometric growthmodelby means
of a diagram.
5. Energy projections * Our nextobjectiveis to providea referencepointforthe anal-

ysisof energypolicyby establishingdetailedprojectionsof energy
demandand supply,energypriceand cost,and energyimportsand
exports.Our projectionscover the years 1975, 1980, 1985, and
2000 and are based on the assumptionthat thereare no major
changesin energypolicy,eitherby U. S. or foreigngovernments,
over the forecastperiod.The projectionsincludethe entirematrix
in currentdollarand in constantdollar
transactions
of interindustry
flow.We translatethisinformation into physicaltermsby convert-
ing the constantdollar energytransactionsinto Britishthermal
units(Btu) foreach fuel.24We also convertthe price indicesinto
dollarsperphysicalunit.This transformationpermitstheexpression
and
23 The data are presentedin a series of articlesby Christensen
EDWARD A. HUDSON AND Jorgenson [13, 14, 15, 16].

488 / DAIE W. JORGENSON 24 The conversion section.
processis discussedin thefoilowing

C-) LUL ~LL C/ 2~
F- C
-j~~ -> >)C LU- - C:)U
F-
< LU C=
LU -4b
:> - 0L
< - C
~ ~ ~ ~
Lu C)L CL
-0 <)
C) LL CLC <C) L
CL C/) C= C-) C/)

LU-A C IU C/ - LL
C-) u- ~ ~ ~ ~ ~ c-
-
<C, F-C)L U
LL-0 C c
z~~~~~~~;
0~~~~~~C)L -C l _
F-FHL-
C:z cCLL UL
LI~~~~~~~~~~~~L
w~~~~~~~~~~~~~~~~~~-
0UL -
0- - F -C F
H~~~~~~~~~~~~~:
I -L -L
C~
-C
-C
U C)C)L
D L
-L ~ F
~ >~U-~
C~~~~)U ~ i
Lu F- CL2~~~~~~
Lu F- cC OLICESUOR EERG
< < F- CL < < < < < =~ ~ ~ ~ EQULIRIU /48

projectionsin the energybalance
of our detailed interindustry
framework thatis conventionalin energyanalysis.25
A summaryof thecompositionand growthof the interindustry
forthe U. S. economyis givenin Table 6. This table
transactions
TABLE 6
U.S. INDUSTRY OUTPUT AND PRICES, 1975-2000 (AVERAGE ANNUAL

GROWTH RATES, PERCENT)
OUTPUT OF REAL DOLLARS PRICES CURRENT

SECTOR RADOLR PICSDOLLARS
1 2.82 4.97 7.93
2 3.92 3.49 7.55
3 4.30 2.33 6.73
4 3.51 4.15 7.81
5 2.73 6.45 9.36
6 1.64 4.46 6.17
7 2.15 5.80 8.06
8 5.25 3.54 8.07
9 1.05 6.68 8.98
CONSUMPTION 3.82 3.64 7.80
INVESTMENT 3.80 3.93 7.88
GOVERNMENT 3.78 4.11 8.05
NET EXPORTS 6.29
GNP 3.85 3.76 7.75
presentsinformation on the grossoutputof each producingsector,

togetherwithinformation on the dispositionside of GNP. The rate
of growthof real GNP is expectedto slow somewhatfromrecent
levels,in large part because of the expecteddeclinein the rate of
increaseof thelabor force,but onlyto around3.85 percenta year.
Inflationalso is expected to slow fromrates experiencedin the
recentpast but,at 3.76 percenta year,to remainabove typicalhis-
toricalrates.
The compositionof GNP is expectedto changegradually.Net
exportsabsorban increasingfractionof GNP as thetermsof trade,
particularly relatingto raw materials,continueto move againstthe
United States.Real government purchasesfall in relationto total
output,althoughthe rapid rate of increasein the price of govern-
mentpurchases,primarilyof its purchasesof labor and services,
offsetsthisand resultsin a smallincreasein thecurrentdollarshare
of government purchasesof GNP. Personal consumptionin real
termsincreasesin line withGNP but, because of the slowerthan
averageincreasein consumptionprices,the currentdollar share of
consumptionin GNP falls. Private investmentin real termsin-
creases more slowlythan GNP but, in currentdollars,it increases
morerapidly.
The compositionof productionchangesmorenoticeably.Agri-
culture,nonfuelmining,and construction outputincreasesrelatively
slowly,as the outputis income inelastic,while the expectedpro-
ductivityadvance in manufacturing and transportpermitsa com-
parativelyrapid increasein outputfromthese sectorswitha less
than average increasein prices. Communications,trade,and ser-
vices outputcontinuesto increasebut less rapidlythan real GNP
and, due to the slow productivity advance in this sector and its
490 / DALE W. JORGENSON 25 See note5, above.

relativeintensityin an increasingcost input,labor, its prices in-
crease comparatively rapidly.
LI Energybalance. Our projectionof total U. S. energyutiliza-

tionforthe period 1975 to 2000 is summarizedin Table 7. Total
TABLE 7
lJ.S. ENERGY INPUT, 1970-2000
1970 1975 1980 1985 2000
1. U.S. TOTALENERGYINPUT(QUADRILLION
BTU)
COAL 12.922 13.260 14.304 16.538 26.891

PETROLEUM 29.614 33.696 39.176 44.547 58.148
NATURALGAS (EXC.SYN.GAS) 22.029 24.727 26.888 28.145 28.681
HYDRO,NUCLEAR,OTHER 2.879 5.416 10.115 16.096 47.521
TOTAL 67.444 77.099 90.484 105.326 161.241
2. TOTALENERGYINPUT,GROWTHRATES(AVERAGEPERCENTPER ANNUM)
COAL 0.52 1.52 2.94 3.29

PETROLEUM 2.62 3.06 2.60 1.79
NATURALGAS 2.34 1.69 0.92 0.13
HYDRO,NUCLEAR,OTHER 13.47 13.31 9.74 7.48
TOTAL 2.71 3.25 3.08 2.88
3. TOTALENERGYINPUT,COMPOSITION
(PERCENTOF TOTAL)
COAL I 19.16 17.20 15.81 15.70 16.68

PETROLEUM 43.91 43.70 43.30 42.29 36.06
NATURALGAS 32.66 32.07 29.72 26.72 17.79
HYDRO,NUCLEAR,OTHER 4.27 7.02 11.18 15.28 29.47
TOTAL 100.00 100.00 100.00 100.00 100.00
energyinp-ut is forecastto increasefrom77.099 quadrillionBtu in

1975 to 161.241 quadrillionBtu in 2000, an averageannualgrowth
rate of 3.0 percent.The rate of increaseof this total varies over
time.In thepast the rateof increaseof totalinputhas variedfrom
3.7 percenta year over the 1960 to 1965 period,to 4.8 percent
over 1965 to 1970, to 3.9 percentfor 1970 to 1973. Our forecast
1975 total correspondsto a 2.7 percentincreasefor the 1970 to
1975 period.
The continuedincreasein fuel pricesand the continuedpres-
ence of some generalinterestin energyconservation, togetherwith
the changingstructure of the economy,preventthe rateof increase
in energyuse fromreturning to historicaltrends.These forceslead
to severalavenues of energyconservation.Wastefulenergyuse is
reduced,existingcapital is graduallyreplaced with more energy
efficientcapital, and output shiftstowards less energy-intensive
forms,leadingto a steadydeclinein the projectedrate of increase
of totalenergyinput.Thus, projectedU. S. grossenergyinputin-
creasesat 3.2 percentoverthe 1975 to 1980 period,at 3.3 percent
over 1980 to 1985, and at 2.9 percentover 1985 to 2000.
The compositionof totalenergyinputis also expectedto change
markedly.Coal is projectedto declineslightly in relativeimportance
until1985 but thento increaseuntil2000 as new demandforcoal
for syntheticgas productionis superimposedon the continuing POLICIES FOR ENERGY
demandforcoal forelectricity generation.The netresultis thatthe EQUILIBRIUM / 491

shareof coal in totalinputis almostthe same in 2000 as in 1975.
Petroleumshows a continuingdeclinein relativeimportance.Use
of petroleumcontinuesto increaseat around 2.8 percenta year
until1985 but thisincreasegraduallyslows as the introduction of
moreenergyefficient capital and changein economicpatternshave
theirprincipaleffectsin reducingdemand for petroleum.For ex-
ample,use of moreefficient automobiles,moreuse of publictrans-
port,betterbuildinginsulation,use of heat pumps in heatingand
coolingall have a majoreffectin slowingtheincreasein petroleum
use. Thus, by 2000, petroleumis projectedto form36 percentof
totalenergyinput,comparedto 44 percentin the 1970s.
Naturalgas is predictedto declinedramaticallyin relativeim-
portance.This is due primarily to expectedsupplylimitations
which
preventitsuse fromkeepingpace withtheotherfuels.The shareof
naturalgas in total energyfalls from32 percentin 1975 to 18
percentin 2000 (although,in termsof consumption, synthetic
gas
supplementsthe availabilityof gaseous fuels). Finally,the hydro,
nuclear,and othersharein totalinputis expectedto increasedra-
matically.This is due to rapidlyincreasinguse of electricityand
to the steadilyincreasingimportanceof nucleargenerationwithin
the electricitysector. The 9-percentaverage annual increase of
hydroand nuclearinputoverthe 1975 to 2000 periodresultsin its
share in total input'sincreasingfrom7 percentto 29 percent.
Consumptionof each typeof energyis shownin Table 8. Coal
TABLE 8
U.S. ENERGY CONSUMPTION, 1970-2000*
1970 1975 1 1980 1985 2000
1. U.S. ENERGYCONSUMPTION
(QUADRILLION
BTU)
COAL 12.922 13.260 14.304 16.538 26.891

PETROLEUM 29.614 33.696 39.176 44.547 58.148
ELECTRICITY 5.218 6.646 8.854 11.499 23.873
GAS 22.029 24.727 26.888 28.835 32.321
GROWTHRATES(AVERAGEPERCENTPER ANNUM)
2. ENERGYCONSUMPTION,
COAL 0.52 1.52 2.94 3.29

PETROLEUM 2.62 3.06 2.60 1.79
ELECTRICITY 4.96 5.90 5.37 4.99
GAS 2.34 1.69 1.41 0.76
3. ENERGYCONSUMPTION,
PHYSICALUNITS
COAL(MILLIONSHORTTONS) 525.00 573.00 618.00 715.00 1163.00

PETROLEUM(MILLIONBARRELSA DAY) 14.70 16.72 19.44 22.11 28.86
ELECTRICITY(BILLIONKILOWATTHOURS) 1530.00 1938.00 2590.00 3363.00 6981.00
GAS (TRILLIONCUBICFEET) 21.37 23.97 25.90 27.76 31.10
*COALCONSUMPTIONINCLUDESCOALUSED IN ELECTRICITYGENERATION
ANDIN
THE PRODUCTION
OF SYNTHETICGAS. PETROLEUMCONSUMPTIONINCLUDES
PETROLEUMINPUTSINTOELECTRICITYGENERATIONAND SYNTHETICGAS.
GAS CONSUMPTIONSINCLUDESBOTHNATURAL ANDSYNTHETICGAS.
consumptionincreasesat an average rate of 2.7 percentover the

1975 to 2000 period,petroleumconsumptionat a rate of 2.2 per-
at 5.3 percentand gas (naturalplus synthetic)at
cent,electricity
EDWARD A. HUDSON AND 1.1 percent.These growthrates vary withinthe period,typically
492 / DALE W. JORGENSON increasingover the 1975 to 1980 period, comparedto rates for

1970 to 1975, whichare reducedas a resultof the 1973 to 1974
energycrisis.After1980 the growthratessteadilydeclineover the
remainderof the century.The dominanttrendin these aggregate
consumptionfiguresis the continuedrapid increase in electricity
consumption.
The rapid increase in electricity use has several implications.
First,sinceelectricityis a secondaryformof energysuffering large
energylosses in the conversionfromprimaryfuels,it is veryex-
pensivein termsof energyinputand its rapid growthproduces a
rapid growthin the use of primaryfuels.In otherwords,the cost
of the electricitygrowthin energytermsis the absorptionof ever
increasingproportions of totalenergyinputin electricityconversion
loss. For example, in 1975 electricityconversionlosses are pro-
jected to amountto 13.9 quadrillionBtu, or 18.1 percentof total
energyinput,but in 2000 these losses are projectedto be about
50.0 quadrillionBtu,whichis 31.0 percentof totalenergy.
The second implicationof electricity use is derivedfromthe
fact that any fuel can be used as the primaryinputto electricity
generation.Uranium and hydro resources,at present,have no
alternativeuse, althoughuraniumenrichment forpresentgeneration
nuclear reactorsis a heavyuser of electricity. Also, the abilityto
use any fossilfuelgiveselectricity generationsome degreeof com-
parativeadvantageover finaluse of thesefuels.Electricitygenera-
tioncan exploitcoal, whichis in relativeabundancein the United
States, and residual oil, which, for technicalreasons, has only
limitedvalue as a fuel in other uses. In short,electricityhas a
propertythatpartiallyoffsets its largeenergyrequirements, forthe
cheapestand most abundantfuels can be used in its generation,
leavingscarce oil and gas suppliesavailable fordirectuse.
Projected fuel prices are shown in Table 9. All prices are
TABLE 9
U.S. ENERGY PRICES, 1970-2000
1970 1975 1980 1985 2000
1. FUEL PRICES, CURRENTDOLLARS
COAL($/SHORTTON) 7.59 11.48 16.38 22.84 54.83

CRUDEPETROLEUM($/BARREL) 3.39 7.12 8.64 10.97 21.20
ELECTRICITY(c/KILOWATT HR.) 1.61 2.11 2.56 3.01 5.04
GAS ($/THOUSAND CUBIC FT.) 0.83 1.05 1.48 1.97 5.03
2. FUEL PRICES,GROWTHRATES (AVERAGEPERCENTPER ANNUM)
COAL 8.63 7.36 6.88 6.01

CRUDE PETROLEUM 16.00 3.95 4.89 4.49
ELECTRICITY 5.56 3.94 3.29 3.50
GAS 4.81 7.11 5.89 6.45
GNP PRICE DEFLATOR 5.63 4.11 3.70 3.66
3. FUEL PRICES, CONSTANTDOLLARS
COAL($1975/SHORTTON) 5.77 11.48 13.39 15.57 21.80

CRUDEPETROLEUM($1975/BARREL) 4.46 7.12 7.06 7.48 8.42
ELECTRICITY(c1975/KILOWATTHR.) 2.12 2.11 2.09 2.06 2.00
GAS($1975/THOUSAND CUBICFT.) 1.09 1.05 1.21 1.34 2.00
expectedto increasein currentdollars,coal by an average of 6.5 POLICIES FOR ENERGY

percenta year over the 1975 to 2000 period,crude petroleumby EQUILIBRIUM / 493

4.5 percent,refinedpetroleumproductsby 5.8 percent,electricity
by 3.5 percent,and gas by 6.5 percent.These rates of increase
reflectboth supplyand demandfactors.The rapid increasein coal
pricesis due largelyto the slow productivity advance expectedin
thecoal miningindustry; and expensein secur-
increasingdifficulty
ingcrudeoil bothdomestically and fromforeignsources,combined
withdemandconditionsin petroleumproductmarkets,operateto
produce continuingrapid increasesin oil prices; electricity prices
increasebut, due to continuedproductivity advance in the electric
utilitiessector,at a muchslowerrate than otherprices;gas prices
rise rapidlyas an increasingdemand faces a relativelyinelastic
supply (this presupposesa relaxationof price controlson natural
gas).
Whenthe ratesof increaseof fuelpricesare comparedto gen-
eral inflation,whichaverages 3.8 percentover the 1975 to 2000
period,a somewhatdifferent pictureemerges.First,coal, petroleum,
and gas pricesall show a significant increasein real terms,which
is in markedcontrastto historicalexperience,e.g. between 1951
and 1971 real coal pricesfell 15 percentand real pricesforrefined
petroleumproductsfell17 percent.This risingpricetrendprovides
a strongincentiveforeconomyin theuse of fossilfuels.The second
price featureis that electricityprices,in real terms,fall slightly,
althoughthe 5-percentfall between1975 and 2000 is again much
less thanthe43-percentfallthatoccurredbetween1951 and 1971.
Comparedto past experience,the slowerdeclinein real electricity
pricesexertssome pressureto slow thehistoricalrateof increasein
electricityuse, but the main effectof the real electricityprice
declineis to continueto promotethe substitution for
of electricity
otherfuels.
The fuel supplysectionsof the energyforecastsare shownin
Table 10. Althoughour interindustry model takes accountof pro-
ductionand supplypossibilitiesafterthe primaryextractivestage,
it does not includeany detailedinformation on the supplycharac-
teristicsof the U. S. fuel extractingindustries.Indeed, givencur-
rentknowledge,any supplyside predictions,particularly to 2000,
are hazardous. The supplyfiguresshown in Table 10 represent,
essentially,estimatesappended to the model. Coal has no supply
problemsconcerningits existence;the only problemsconcernthe
pricesat whichminingand land reclamationbecomeeconomic.Our
coal supplyinformation representsan extrapolationof past data
and is embodied in the coal sector productionstructureof the
model. The U. S. oil outputfiguresare based on an ad hoc com-
binationof past price elasticitiesand currentinforination concern-
ing futureoil fields,such as the NorthSlope and otherAlaskan
fields.Importsmake up the difference betweenU. S. demandand
supplyat each oil price. Our estimatesforU. S. outputof natural
gas are based upon estimatesmade by various governmentand
privateagencies,as are our estimatesfor the outputof synthetic
gas and of shale oil.
The energyflowsforecastfor the 1975 to 2000 period are
presentedin detailin Table 11 and in summaryformin Table 12.
EDWARD A. HUDSON AND The interindustry energyflowsare shown in trillionsof Btu for
494 / DALE W. JORGENSON each of the fourfuels-coal, petroleum,electricity, and gas-into

TABLE 10
U.S. ENERGY SUPPLY, 1970-2000
1970 1975 1980 1985 2000

COAL(MILLIONSHORTTONS)
PRODUCTION 598 658 707 819 1291
EXPORTS 72 85 89 104 129
U.S. CONSUMPTION 525 573 618 715 1163
PETROLEUM (MILLIONBARRELSA DAY)
U.S. CRUDEOUTPUT GASLIQUIDS)
(INCLUDING 11.54 10.61 13.91 17.82 21.41
U.S. OUTPUTOF SHALEOIL 0.00 0.00 0.00 0.00 4.29
IMPORTS 3.42 6.40 5.78 4.51 3.28
U.S. CONSUMPTION 14.70 16.72 19.44 22.11 28.86
EXPORTS 0.26 0.29 0.24 0.23 0.12
GAS(BILLIONCUBICFEET)
U.S. OUTPUT
OF NATURAL
GAS 20616 21838 22510 23620 23812
U.S. OUTPUT
OF SYNTHETIC
GAS 0 0 0 664 3502
IMPORTS 821 2210 3443 3525 3813
U.S. CONSUMPTION 21367 23966 25898 27762 31097
EXPORTS 70 81 55 47 30
TOTAL(QUADRILLION
BTU)
U.S. ENERGY
INPUT 67.444 77.099 90.484 105.326 161.241
EXPORTS 2.610 2.604 2.601 2.905 3.256
TOTALDEMAND 70.054 79.703 93.085 108.231 164.497
IMPORTS 8.235 15.880 15.886 13.273 11.040
SUPPLEMENTAL GAS,SHALEOIL)
(SYNTHETIC 0.000 0.000 0.000 0.690 12.281
AS PERCENTAGE
IMPORTS OFTOTALDEMAND 11.76 19.92 17.07 12.26 6.71
AS PERCENTAGE
SUPPLEMENTAL OF TOTALDEMAND 0.00 0.00 0.00 0.64 7.47
each of thenine intermediate and fourfinaluse sectors.These Btu

flowsare obtainedby applyingexogenousBtu/constant dollarratios
to thefuelentriesin the constantdollartransactionmatrices.Since
we are operatingat a greaterlevel of disaggregation of fuel uses
thanis givenin energydata, it was necessaryto make some sim-
plifyingassumptions to obtainthetranslation of dollarsto Btu's.
Informationis available for the Btu/constantdollar ratio for
each fueland thisratioforfuelinputsto electricity generationcan
also be accuratelyderivedfrompublisheddata. Thus, thereis no
problemin derivingthe figuresfor total use of each fuel or for
fuel inputsinto electricity.To fillin the remainingBtu entriesit
was assumedthat,withineach fuel,the same Btu/constantdollar
ratioapplied to each remainingentrywithcertainexceptions.The
exceptions,whichembodywhat otherinformation is available,are
to householdsand to agriculturetake place
thatsales of electricity
at a price 67 percentabove thatchargedotherusers,thatpetro-
leum productsto householdsand to agriculturehave, because of
the productmix, a price 50 percentand 25 percent,respectively,
above the averageprice chargedotherusers,and thatthe price of
gas to householdsin 1971 was $1.48/millionBtu, the price to
manufacturing was $0.56, and that gas prices to otherusers are
equal.
Coal is used primarilyin manufacturing, coal mining,electricity
generation,and for export.The firsttwo uses are relativelyun-
changing;the projectedgrowthin coal consumptioncomes in its POLICIES FOR ENERGY
use in electricitygeneration,its use for export,and, in the latter EQUILIBRIUM / 495

TABLE 11
COMPOSITION OF U.S. ENERGY USE, 1970-2000,INTERMEDIATEAND FINALDEMAND BY SECTOR
(ALL FIGURES IN TRILLIONBTU)
SUPPLY TOTAL DEMAND

ENERGY
INPUTSTO SECTOR
U ---I
U.S. IPORTS DEMAND,
DMN 111101121
OUTPUT SUPPLY 1 2 3 4 5 6 7 8 9 10 I 11 12 13
COAL
1970 14911 2 14913 27 3342 15 440 1223 0 17 7483 6 173 159 36 1991
1975 15208 9 15217 0 3225 0 147 1228 0 0 8522 0 102 4 33 1955
1980 16356 9 16365 0 3040 0 74 853 0 0 10227 0 74 4 33 2061
1985 18929 10 18939 0 2833 0 66 863 0 0 11818 844 75 4 34 2401
2000 29850 16 29866 0 3904 0 90 1316 0 0 15985 5504 32 7 43 2975
PETROLEUM
1970 22773 7388 30161 3830 4747 2614 3903 32 83 150 2087 148 10523 126 1360 547
1975 20677 13592 34269 4349 5587 2931 4383 34 51 127 2375 165 12115 79 1500 573
1980 27330 12327 39658 4897 6476 3696 5057 59 44 138 2567 197 14261 107 1677 482
1985 35212 9628 45001 5586 7575 4480 5931 94 29 160 2830 318 15555 125 1865 453
2000 51252 7092 58395 8244 11602 6210 9340 165 0 181 3918 | 625 1153661119 1 2379 1 247
ELECTRICITY
1970 5220 0 5220 101 1388 19 1459 21 44 43 596 0 1396 0 149 4
1975 6646 0 6646 122 1796 22 1753 29 46 31 671 0 1987 0 184 4
1980 8857 0 8857 173 2261 30 2248 40 73 14 835 0 2950 0 228 4
1985 11502 0 11502 150 2709 36 2910 61 119 0 928 0 4254 0 331 4
20001 23876 1 0 1 23876 1 245 1 4771 1 55 15487 1 180 1 227 1 0 1 1613 1 0 1106971 0 1 597 1 4
GAS
1970 21255 846 22101 171 8884 281 1804 7 0 968 4015 595 4722 0 582 72
1975 22654 2279 24933 204 10215 347 2024 7 0 817 4245 599 5509 0 889 76
1980 23389 3550 26943 235 11389 414 1931 9 0 1231 4505 589 5716 0 869 55
1985 25276 3635 28882 278 13643 431 1742 13 0 1160 4856 568 5321 0 798 47
2000 28587 3932 32351 334 17425 450 1461 26 0 586 6472 475 4274 0 809 30
part of the forecastperiod,as an inputto synthetic gas. The sum-

marytable bringsout the factthatcoal is entirelyused as an inter-
mediatefueland thatitsuse is projectedto increaseat an increasing
rate.
Petroleumproductsare used heavilyin all sectors.Here, growth
ratesare projectedto differsharply,forthe demandforpetroleum
in finaluse increasesonlyslowly,whileintermediate demandcon-
tinuesto increaserapidly.Use of petroleumproductsin all inter-
mediate sectors continuesto increase at similar rates, with the
averageincreasebeing3.0 percentin the 1975 to 1985 period,then
fallingto 2.7 percentfrom1985 to 2000. Final demand,particu-
larlyforpersonalconsumption use, growsmuchmoreslowly,rising
to a peak in the mid-1980s and thenremainingsteadyoverthe rest
of the forecastperiod.
The slow growthof finaldemand is due to various factors-
higherpetroleumprices and the conservationethic's stimulating
economyin use of petroleum,the incorporationof energy-saving
devices such as more buildinginsulation,heat pumps, and more
efficientheatingunits into the capital stock of buildings,the re-
placingof largecars by moreenergyefficient vehicles,bothsmaller
cars and morepublic transport, of electroniccom-
the substitution
municationforsomepurposespresently achievedby movingpeople,
EDWARD A. HUDSON AND in thehome'spartiallyreplacing
and theincreasinguse of electricity
496 / DALE W. JORGENSON petroleum.The timeinvolvedin these changesis ratherlong, for

TABLE 12
COMPOSITION OF U.S. ENERGY USE, 1970-2000,SUMMARY
USE (QUADRILLION
BTU) GROWTH
RATES(AVERAGE PERANNUM)
PERCENT
FINAL INTERMEDIATE U.S.TOTAL FINAL INTERMEDIATE U.S.TOTAL
1970 0.368 12.554 12.922
1975 0.139 13.123 13.260 -17.69 0.89 0.52
COAL 1980 0.111 14.193 14.304 - 4.40 1.58 1.52
1985 0.113 16.424 16.538 0.36 2.96 2.94
2000 0.092 26.799 26.891 - 1.36 3.32 3.29
1970 12.019 17.595 29.614

1975 13.694 20.002 33.696 2.64 2.60 2.62
PETROLEUM 1980 16.045 23.131 39.128 3.22 2.95 3.06
1985 17.545 27.002 44.547 1.80 3.14 2.60
2000 17,864 40.284 58.148 0.12 2.70 1.79
1970 1.545 3.673 5.218
1975 2.171 4.471 6.642 7.04 4.01 4.96
ELECTRICITY 1980 3.178 5.676 8.854 7.92 4.89 5.90
1985 4.585 6.914 11.499 7.61 4.02 5.37
2000 11.294 12.579 23.873 6.19 4.07 4.99
1970 5.304 16.725 22.029

1975 6.398 18.459 24.857 3.82 1.99 2.34
GAS 1980 6.585 20.303 26.888 0.58 1.92 1.69
1985 6.119 22.716 28.835 - 1.46 2.27 1.41
2000 5.083 27.238 32.321 - 1.23 1.22 0.76
firstattitudesmustbe changed,by economic,regulatory, and other

pressures,and then these attitudesmust be translatedinto new
capital stockwhich,typically, mustwaitupon the depreciationand
replacementof theexistingstock,or in some cases, suchas building
insulation,can be incorporatedinto existing,highlydurablestock.
In any event,a long timelag is predictedbeforethe fulleffectsof
thisconservation become feltin termsof reducedenergyinputbut
ultimately, in the 1980s and 1990s, the scope for conservationis
large enoughto permitincreasinglevels of effective servicesto be
sustainedfroma constantinputof petroleumenergy.
Electricityconsumptionincreasesat a rapid rate-5.3 percent
a yearbetween1975 and 2000. The overallrateof increasesteadily
decreases,afteran increasein the 1975 to 1980 period compared
to the previousfiveyears,due to the 1975 consumptionfigure's
beingdepressedby the reactionto the currentenergycrisis.As in
petroleumuse, finaland intermediate demandcomponentsgrowat
different rates but, with electricity,it is finaldemand that grows
morerapidly.Intermediate use of electricityincreasesat an average
of 4.2 percenta yearwithuse in the servicessectorincreasingthe
most rapidly,at 4.7 percent,and manufacturing use increasingat
4.0 percent.Final use of electricity increasesat 6.8 percenta year
withthe mostrapid increasetakingplace in personalconsumption
whichincreasesat 6.9 percenta yearoverthe 1975 to 2000 period.
This use of electricity
in personalconsumption formsthemostrapid
increaseof any use of any fuel and, in this,continuesthe same
trendthathas been observedin the past. The rate of increaseis
slowerthanthatof the past due to the different pricebehavior,the
new awarenessin energyconservation,the introductionof more POLICIES FOR ENERGY
energyefficient capital such as heat pumpsand thermalinsulation, EQUILIBRIUM / 497

and the approach to saturationof such heavy electricity users as
homeair conditioning, dishwashers,laundries,rangesand so on.
Gas consumptionis forecastto increasecomparativelyslowly
and at a decliningrate. Increasinguse of gas is limitedto two
sectors-manufacturing and electricity
generation-withuse in other
sectors,primarilyservicesand personalconsumption, declining.The
net resultis that finaldemand for gas declines,but intermediate
demand continuesto increase,althoughat a decliningrate. The
projectedpriceincreasesforgas reduceits use in serviceand final
use sectors,whereits place is taken by petroleumand electricity,
but gas remainsimportantas an inputinto manufacturing and to
electricitygenerationbecause of its nonprice advantages-it is
clean burning,easily handledand it has manyuses as a material,
ratherthana fuel,input.
The compositionof inputsinto the electricity
generationsector
is shownin Table 13. The dominantfeaturehere is the projected
TABLE 13
COMPOSITION OF INPUTS TO U.S. ELECTRICITY GENERATION, 1970-2000
(PERCENT OF TOTAL INPUT)
1970 1975 1980 1985 2000
COAL 45.4 41.5 37.3 33.2 21.6
PETROLEUM 12.7 11.5 9.4 7.9 5.3
GAS 24.4 20.6 16.4 13.6 8.8
HYDRO, NUCLEAR, OTHER 17.5 26.4 36.9 45.2 64.3
increasein hydroand nuclear,virtuallyall the increasebeing in

nuclear, generation.In 1970 hydro and nuclear provided 17.5
percentof total inputbut this proportionincreasesto 64 percent
by 2000. Coal input,althoughgrowingrapidlyin absoluteterms,
declinesin relativeimportanceas-an inputfromsupplyingalmost
halfof totalinputsin 1970 to one-fifth in 2000. Similarly,although
petroleumand gas inputsincreasein absoluteterms,thisincrease
is relativelyslow and theyshow a steadydeclinein proportionto
total input.
The changingcompositionof inputsinto electricity generation
reflectsrelativeprices and is undertakenby the electricity genera-
tion sector in responseto marketforces.But, these forces also
reflect,in part at least, a basic characteristic
of U. S. fuel supply
possibilities.Coal, uranium,and hydropower are not only rela-
tivelyabundantbut also have a low economic opportunity cost,
for,apart fromelectricity absorbed in uraniumenrichment, they
have comparatively fewalternative uses,whereaspetroleumand gas
fuels are not only in relativelyshortsupplybut also have many
alternativeuses thatrendertheiropportunity cost, foruse in elec-
tricitygeneration, veryhigh.In theserespects,and omitting nuclear
safetyfromconsideration, the forecastoutcomeof marketforces,
as theyaffectinputsto electricity generation,appearsto be entirely
EDWARD A. HUDSON AND consistentwiththeobjectivesof currently proposednationalenergy
498 / DALE W. JORGENSON policies.

nl Alternativeprojections.This section presentssummarycom-
parisonsbetweenour energyprojectionsand alternativeprojections.
This comparisonis conductedfortwo purposes: first,to obtain an
independentcheck that our forecastsare of reasonableordersof
magnitudeand, second, to pinpointthe differences betweeneco-
nomicallybased forecastsand technologicallybased forecasts.The
alternativeforecastsconsideredare those preparedby the Com-
mitteeon the U. S. Energy Outlook of the National Petroleum
Council,26referredto as NPC, theU. S. Departmentof theInterior
forecastspreparedby Dupree and West, denoted DW, and, for
various forecastsreportedby Chapman, Mount, and
electricity,
Tyrrell,27denotedCMT.
The fossil-fuel
projectionsof our interindustry
model,denoted
HJ, of the NPC, and of Dupree and West are shownin Table 14.
TABLE 14
ALTERNATIVE FORECASTS OF U.S. ENERGY UTILIZATION*
DW HJ NPC
| GROWTH GROWTH GROWTH

QBTU |
Q BTU Q
QBURATE
| Q BTU
QBURATE
~~RATE
COAL
1970 12.922 12.922 12.922
1975 13.825 1.4 13.260 0.5 16.1 4.5
1985 21.470 4.5 16.538 2.2 22.7 3.5
2000 31.360 2.6 26.891 3.3
PETROLEUM
1970 29.614 29.614 29.614
1975 35.090 3.5 33.696 2.6 39.8 6.1
1985 50.700 3.7 44.547 2.8 56.2 3.5
2000 71.380 2.3 58.148 1.8
GAS
1970 22.029 22.029 22.029
1975 25.220 2.7 24.727 2.3 21.3 -0.7
1985 28.390 1.2 28.145 1.3 21.1 -0.1
2000 33.980 1.2 28.681 0.1 _ _
TOTAL INPUT
1970 67.444 67.444
1975 80.265 3.5 77.099 2.7
1985 116.630 3.8 105.326 3.2
2000 191.900 3.4 161.241 2.9 _
* DWIS DUPREE
ANDWEST,HJIS OURPROJECTION,
NPCIS THENATIONAL
PETROLEUM RATESAREAVERAGE
GROWTH
COUNCIL.
ANNUAL 0 BTUIS QUADRILLION
RATESOF GROWTH.
PERCENTAGE BTU.
For 1975 our forecastsand thoseof Dupree and West are similar,
althoughfor each fuel and for total input,ours are lower. The
higherfuelpricesincorporatedintoour projectionsreducefueluse
below the extrapolationsof past trendsused by Dupree and West.
This same relationshipcontinuesfor 1985 and 2000; i.e., our fore-
casts and those of Dupree and West are reasonablyclose, but the
divergenceincreasesover time,withour energyuse always being
below thatin Dupree and West.This indicatesfirst,thatthe orders
26 SeeNationalPetroleumCouncil[36].
27 SeeChapman,Mount,and Tyrrell[1970]; a detailedreporton the
econometricmodel underlyingtheseprojectionsis givenby Mount,Chap- POLICIES FOR ENERGY
man, and Tyrrell[34]. EQUILIBRIUM / 499

of magnitudeof our forecastare consistentwithpast energytrends
used by Dupree and West,and second,thatsimpleextrapolations
Expected fuel price increasesand
of these trendsare insufficient.
changes in the nonenergysections of the economy do exert a
influenceworkingto depressenergyuse below historical
significant
trends.The NPC forecastsfor 1975 do not, at the presenttime,
appear veryrealisticand the 1985 NPC forecastsare also open to
question.The factthatour projectionsare wellbelow thoseof NPC
givesfurther weightto the need to take accountof price and other
factorsthat affectdemand.
Consider now the various projectionsof electricityconsump-
tion,givenin Table 15. The strikingimpressiongainedfromthese
TABLE 15
ALTERNATIVE FORECASTS OF U.S. ELECTRICITY CONSUMPTION
(TRILLION KILOWATT HOURS)
PROJECTION * 1970 1975 1980 1985 1990 2000
CORNELL-NSF 1.57 2.15 2.92 3.96 5.38 10.25

CMT-HIGH 1.53 2.14 3.05 - 5.66 9.89
-MEDIUM 1.53 1.98 2.38 - 3.01 3.45
-LOW 1.53 1.88 2.07 - 2.11 2.01
DW 1.53 2.13 3.00 4.14 - 9.01
FPC 1.53 - 3.07 - 5.83 -
HJ 1.53 1.94 2.59 3.36 - 6.98
NPC 1.59 2.29 3.29 4.54 - -
*CORNELL-NSFIS CORNELL-NATIONAL
SCIENCEFOUNDATION CMTIS CHAPMAN,
WORKSHOP;
MOUNT, ANDTYRRELL;DW IS DUPREEANDWEST; FPC IS FEDERALPOWERCOMMISSION;
HJIS OURPROJECTION;
NPC IS NATIONALPETROLEUMCOUNCIL.
SOURCES: CORNELL-NSF, FPC, NPC FORECASTSARE GIVENIN CHAPMAN,

MOUNT,AND
TYRRELL(1972),TABLE1, PAGE3. THE CMT"LOW"FORECASTASSUMESTHATTHEREAL
ELECTRICITYPRICEDOUBLESBY 2000, THE "MEDIUM"FORECASTCORRESPONDS TO THE
FPC ESTIMATESOF A 19-PERCENTREALPRICEINCREASEOVER1970-1990. "HIGH"
CORRESPONDS TO A 24-PERCENTREALPRICEDECLINEOVER1970-1980 ANDA 12-
PERCENTDECLINEOVEREACHOF THE 1980-1990 AND 1990-2000 INTERVALS.
forecastsis one of greatvariation-theprojected2000 consumption

rangesfrom2.0 to 10.3 trillionKwh. Our forecastsare neverthe
extremeentrybut are always towardsthe lower end of the range
of forecasts.To theextentthatsuch a diversity of forecastspermits
any conclusion,we can say that the above conclusionsare rein-
forced.Our projectionsare in line with otherforecastsbut, by
takingprice and othereconomicfactorsinto account,our projec-
tionsare comparatively low.
All the alternativeenergyforecastsconsideredhere,apartfrom
Chapman,Mount,and Tyrrell'selectricity forecasts,have been pre-
pared withoutexplicitassumptionsabout the growthof real or
relativefuelprices,withoutexplicitconsiderationof interfuelsub-
stitutionsand withoutexplicitaccountof the interactions between
energyand the restof the economyor of futuredevelopmentsin
the rest of the economy.This lack of analysisof the underlying
forcesat workin determining energydemandis a seriousconcep-
tual drawback.The omissionis particularly in viewof the
significant
presentneed to use energymodels to aid the formationof future
EDWARD A. HUDSON AND U. S. energypolicy.Our interindustry model,however,avoidsthese
500 / DALE W. JORGENSON problemsand can providea morerealisticbasis forpolicyanalysis.

* Introduction.This section describes the application of the 6. Energy policy:
interindustryenergymodel to the analysisof one specificenergy a Btu tax
policy-a Btu tax designedto secure energyindependence.This
applicationservesto illustratethe methodologyof the model and
providesan evaluationof a specifictax proposal currentlyunder
consideration.The actual tax consideredis a uniformrate of tax
levied on the energycontentof all fuelsused outside the energy
generationsector;such a tax is proposedin the EnergyRevenue
and DevelopmentAct of 1973, at presentunder considerationin
theSenateFinance Committee.28
The startingpointforthe analysisof thistax is the base case
set of energyprojectionswhichhave been presentedabove. These
projectionsare based on the assumptionof no major new develop-
mentsin energypolicy and so can be used as a referencepoint
againstwhichthechangesinducedby policychangesare measured.
In particular,thefuelimportsin theseforecastsdefinetheobjective
of the policy,whichis to reduce these importsto nominallevels
by a targetdate,whichwe take to be 1985.
The tax has the effectof creatinga wedge betweenthe price
paid by the energyconsumerand that receivedby the producer.
Since the forecastsupplyprices already equal average costs, the
tax is translatedinto an increasein the fuel sellingprice, leaving
the supplyprice unchanged,apart fromindirectimpactson the
supplyprice due to any productioncost increasesthatare caused
by thetax. Therefore,thetax leads to the reductionof fuelimports
solelyby actingon the demand side of the energyequation. This
approachis theoppositeof muchof thepresentdebateaboutenergy
policy,which is supply oriented.It emergesthat demand based
policiescan be extremelyeffective and have the powerto produce
energyindependenceeven withoutaccompanyingsupplyexpansion
policies.
The Btu tax is insertedinto the model by means of price
markupsthat increase the sales prices of fuels above the output
price receivedby the seller.These markupsvaryforthe fivefuels
since the Btu contentof each dollar of fuel outputis different for
each fuel (the costs of Btu's obtainedfromthe various fuels are
latergivenin Table 18). The tax is assumedto be levied only on
energyas it emergesfromthefuelsectorsso thatenergyinputsinto
fuel production,includingthe generationof electricity,are not
subjectto thetax. Also, exportsof fuels,mainlycoal, are considered
exemptfromthe tax.
Afterpricemarkupshave been inserted,the model is solved to
obtaina new set of economicand energyprojections.This involves
solvingfor new outputprices and input-output coefficients,new
finaldemandcomponents,and theassociatedindustry outputlevels
and interindustry transactions.This information is then used to
determinetheenergydeficits-theexcessof U. S. demandforeach
fueloverthedomesticoutput,bothbeingcalculatedin termsof the
new set of prices-which mustbe made up by fuel imports.This
procedurecapturesboth the directaindindirecteffectsof energy
conservation-thedirectsavingof energyas an inputby the sub-
28 This sectionis based on Hudsonand Jorgenson
[24], presented
as testi- POLICIES FOR ENERGY
monyat hearingsby theSenateFinanceCommittee, January16, 1974. EQUILIBRIUM / 501

of otherinputsforenergyas well as the indirectsavingof
stitution
energyproducedby substituting,in productionand consumption,
nonenergy intensivefortheenergyintensivegoods and services.
CI Tax policy and conservation.We proceed in two steps, first

examiningthe effectsof the Btu tax by assessingthe impact of
various rates of tax on the energyand nonenergysectorsof the
economyin 1980 and second,consideringthe specifictax structure
that would be requiredto achieve the objectiveof independence
from energyimportsby 1985. The definitionof energyinde-
pendence used is for zero importsof gas and for only nominal
importsof petroleum,such as would be requiredfor fuelingof
U. S. aircraftand shipsabroad.An arbitrary
limitofone quadrillion
B3tuof energyimportswas adoptedfor 1985; thislimitis less than
10 percentof actual 1973 fuel imports.
The impacton energyuse of various ratesof Btu tax is sum-
marizedin Table 16. These figures
showthattheBtu tax can induce
TABLE 16
IMPACTOF BTU TAXES ON TOTAL ENERGYINPUT,1980
TAX RATE($/MILLIONBTU) 0 0.1 0.3 0.5
TOTALENERGYINPUT(QUADRILLION
BTU) 90.484 88.890 86.004 83.440
CHANGEFROMBASE -1.593 -4.479 -7.043
RATE
CHANGE/TAX -15.930 -14.930 -14.070
PERCENTCHANGEFROMBASE -1.760 -4.950 -7.780
INTERMEDIATE
USE (QUADRILLION
BTU) 70.356 69.321 67.415 65.692
RATE
CHANGE/TAX -10.350 -9.800 -9.330
FINALUSE (QUADRILLION
BTU) 20.127 19.569 18.589 17.748
CHANGE/TAXRATE -5.580 -5.130 -4.760
ENERGYIMPORTS(QUADRILLION BTU) 15.886 14.311 11.435 8371

IMPORTSIN TOTAL INPUT (%) 17.600 16.100 13.300 10.600
TAX REVENUE($ BILLION) 0 6.026 17.400 28.003
reductionsin energyuse and thatit has the potentialfor

significant
reducingdemand sufficiently to secure energyindependence.The
highestrate shown, $0.5 per millionBtu, leads to a decline of
7 quadrillionBtu, or 7.8 percentin energyuse relativeto the no
tax projection.This reductionis made up of substantialcuts in
both finaland intermediateuses of energy.The greaterpartof the
reductioncomes fromthe decline in energyinputto intermediate
production,buttherelativecutbackin use is greaterin finaldemand
whereenergyinputis reducedby 11.8 percent,comparedto the
6.6 percentfall in intermediateuse.
Our resultsindicatethatalthoughfinalusersof energymay be
more responsiveto price increasesthan businessusers,the sheer
volume of energyabsorbed in productionrequiresthat,for max-
EDWARD A. HUDSON AND imum effect,energyconservationpolicies give at least as much
502 / DALE W. JORGENSON weightto reducingintermediate as to reducingfinaldemand. The

responseof bothintermediate and finalusersto the tax varieswith
the tax level with,in both cases, the tax having a diminishing
marginalimpact on energyuse. The decline in effectiveness is,
however,gradual so that a reasonablefirstapproximationis that
each dollar of tax per millionBtu reduces total energyinputby
about 15 quadrillionBtu. This correspondsto an elasticityof Btu
use to Btu price of approximately-0.24.
The detailedadjustmentsby energyusers to the impositionof
the tax are shownin Table 17. These figuresshow,first,the differ-
TABLE 17
IMPACT OF BTU TAXES ON INPUT PATTERNS,1980
BTU)
TAXRATE($/MILLION 0 0.1 0.3 0.5
USE OF ELECTRICITY
INPUT,INCLUDING
ENERGY BTU)
(QUADRILLION
MANUFACTURING 18.908 18.669 18.222 17.909
SERVICES 10.496 10.335 10.032 9.752
GENERATION
ELECTRICITY 27.403 27.289 27.063 26.840
PERSONALCONSUMPTION 20.474 20.025 19.224 18.527
PERCENTAGE INTOTALINPUTS:
CHANGE
ENERGYINPUT -1.76 -4.95 -7.78
CAPITALINPUT 0.11 0.29 0.49
LABORINPUT 0.14 0.39 0.61
COEFFICIENTS
INPUT-OUTPUT INPUTS:
FORTOTALENERGY
AGRICULTURE 0.0245 0.0239 0.0226 0.0216
MANUFACTURING 0.0235 0.0233 0.0232 0.0231
TRANSPORT 0.0447 0.0440 0.0426 0.0413
SERVICES 0.0190 0.0189 0.0186 0.0183
GENERATION
ELECTRICITY 0.1864 0.1859 0.1850 0.1844
FORMANUFACTURING:
COEFFICIENTS
INPUT-OIJTPUT
COAL 0.0026 0.0026 0.0025 0.0025
PETROLEUM 0.0069 0.0068 0.0068 0.0067
ELECTRICITY 0.0085 0.0086 0.0087 0.0088
GAS 0.0055 0.0054 0.0052 0.0051
TOTALENERGY 0.0235 0.0233 0.0232 0.0231

SERVICES
CAPITAL 0.1201 0.1200 0.1199 0.1198
LABORSERVICES 0.2887 0.2889 0.2893 0.2897
INPUT
MATERIALS 0.5164 0.5163 0.5162 0.5160
ent degreesof energyconservationin the fourmajor energycon-

sumingsectors-manufacturing, generation,
services,electricity and
personal consumption.Substantialeconomies are made in the
energyinputto each sector,but thereis a wide difference in the
proportionateresponse: energyused in personal consumptionis
reducedby 9.5 percentin responseto the $0.5 tax rate,withser-
vices uisebeingcut by 7.1 percent,manufacturing use by 5.8 per-
cent,and iniputinto electricitygenerationby 2.1 percent.
Energyuse can be splitinto two broad categories-discretion-
ary use and process use. Discretionaryuse includes inputs for
comfortfunctionssuch as heatingand coolingas well as personal
servicessuch as automobiletravel.Process use covers fuel inputs
for drivingmachinery,heatingmaterials,turninggenerators,and
so on. Discretionaryuses are, typically,characterizedby greater POLICIES FOR ENERGY
flexibility because the associated capital
than process uses, firstly EQUILIBRIUM / 503

stock is generallyless durable and easier to replace with more
energyefficient capital, and secondlybecause discretionary uses
are input to the generationof psychologically, ratherthan tech-
nically,specifiedperformance, e.g., desiredmilesdrivenratherthan
energyinputsrequiredper tonof aluminato be smelted,so thelevel
of use withinthe existingcapital stockcan be more readilyvaried.
Given thiscategorization, it is apparentthatpersonalconsumption
includesa highratio of discretionary to processenergyuse while
this ratio for serviceactivityis a littlelower, for manufacturing
lowerstill,and forelectricity generationlowestof all. This ordering
is preciselythatobservedin the sectoralresponseto the increase
in energyprices.
More specifically, theinput-output coefficients
in Table 17 show
the processesof adjustmentto the tax inducedincreasesin energy
prices.Two typesof adjustmentcan be seen. First,thereis a sub-
stitution of the now relativelyless expensivenonfuelinputsforthe
relativelymore expensivefuel inputs.This is reflectedin the total
energyinput coefficients which,for each sector, decline as the
energytax increases.The manufacturing input-output coefficients
show the outcomeof this substitution process: energyinputsde-
cline, as do inputsof materialsand inputsof capital,withinputs
of labor servicesincreasingto replace the three reduced inputs.
Thus, in manufacturing, energy-capital-materials complementarity
meansthatadjustments to economizeon theexpensiveenergyinput
lead to thereductionin theuse of energy,capital,and materialsand
to theadoptionof morelabor-intensive productiontechniques.
The shiftaway fromenergyin manufacturing is relativelysmall
in termsof changesin input-output but it representsa
coefficients,
substantialamount of energy.A similarprocess of substitution
away fromenergytakes place in all sectors.The overall result,
however,is a littledifferent fromthatin manufacturing. The total
reductionin energyuse is made possible by an increasein inputs
of both capital and labor. That is, on an economy-widebasis,
energy-capitalsubstitutability, such as the use of insulationor
smallercarsto save energy,dominatesthecomplementarity relation
that characterizesmanufacturing. The net effectis that the 7.8
percentfall in energyinput is accommodatedby a 0.6 percent
increase in the demand for labor and a 0.5 percentincrease in
capital use and does not result in a comparable reductionin
potentialoutput.
The second set of adjustmentsoccurs withinenergyinput as
interfuel substitutiontakes place. The tax has the effectof increas-
ing different fuel prices by different extents,dependingon the
energycontentof each fuel.Coal pricesare increasedto thegreatest
extent,withgas pricesnext,thenpetroleum,withelectricity prices
beingincreasedtheleast. The input-output coefficientsforfueluse
in manufacturing, shownin Table 17, illustratethe resultingsub-
stitutions.Coal use declines only slightlyfor, despite the sharp
price increase,coal remainsthe cheapestsource of energyas well
as being,for technicalreasons,used in some production,such as
steel, regardlessof the price changes. The petroleumand gas
EDWARD A. HUDSON AND coefficients both declinemore noticeably.Electricityuse, however,
504 / DALE W. JORGENSON increasessinceelectricity has become a relatively less expensivefuel

forpetroleum
in use permitsit to substitute
and sinceits flexibility
and gas.
The impactof theBtu tax on thepriceand consumption of each
fuelis shownin Table 18. Coal pricesincreaseby the largestpro-
TABLE 18
IMPACTOF BTU TAXES ON ENERGY CONSUMPTION AND PRICES, 1980
BTU)
TAXRATE($/MILLION 0 0.1 0.3 0.5
BTU)
(QUADRILLION
FUELCONSUMPTION
COAL 14.304 14.237 14.104 13.971
PETROLEUM 39.176 38.459 37.138 35.940
ELECTRICITY 8.854 8.817 8.744 8.672
GAS 26.888 26.126 24.791 23.650
FROMBASE
INCONSUMPTION
CHANGE
COAL -0.47 -1.40 -2.33
PETROLEUM -1.83 -5.20 -8.26
ELECTRICITY -0.42 -1.24 -2.06
GAS -2.83 -7.80 -12.04
AVERAGEFUELPRICES
COAL($/TON) 16.3800 17.3100 19.1600 21.0200
REFINEDPETROLEUM WHOLESALE)
($/BARREL, 11.8400 12.3800 13.4600 14.5500
($/KWHR)
ELECTRICITY 0.0256 0.0259 0.0266 0.0273
GAS($/THCU.FT.) 1.4800 1.5500 1.7000 1.8400
INPRICESFROMBASE(PERCENT)
CHANGE
COAL 5.68 16.94 28.33
PETROLEUM
REFINED 4.57 13.71 22.85
ELECTRICITY 1.32 3.96 6.60-
GAS 4.87 14.62 24.36
BTU)
TO TAXEDUSERS($/MILLION
PRICEOF ENERGY
COAL 0.71 0.81 1.01 1.21
PETROLEUM 2.21 2.31 2.51 2.71
ELECTRICITY 7.46 7.56 7.76 7.96
GAS 1.42 1.52 1.72 1.92
portion,withthe averageincreaseof 28 percent,forthe $0.5 tax

rate, comprisinga 70-percentincrease in price to nonfuelpur-
chasers and virtuallyno increase in price in fuel productionor
exportuses. The gas price increasesby 24 percentforthe highest
tax rate, withthe wholesale price of refinedpetroleumproducts
increasingby 23 percentand electricity risingby only 7 percent.
The small price increasefor electricity leads to a correspondingly
small demand decline, only 2 percent.This small decline also
impliesthatcoal inputintoelectricity, themainuse of coal, declines
by only a small proportion.The only othersizeable domesticuse
of coal is in the manufacturing sector,but this use is relatively
insensitiveto price as discussedabove. The price of gas increases
substantially and this,withtheopportunities to economizein itsuse
and to substitute otherfuelsforit, leads to a declineof 12 percent
in its use. Similarly,petroleumprices rise substantially, causing a
decline of 8 percentin the consumption of petroleum. The average
price elasticitiesimplied by these consumption responses are:
-0.08 forcoal, -0.36 for petroleum, -0.31 for and
electricity,
-0.49 forgas. POLICIES FOR ENERGY
The effectsof the Btu tax are not restrictedto the energy EQUILIBRIUM / 505

sectors.There are also effectson the inputstructureof otherpro-
duction,as have been outlinedabove, on the costs and prices of
theseothergoods, on the demandfor thesegoods in intermediate
uses, and on thelevel and compositionof real finaldemand.These
effectsare summarizedin Table 19, whichgives the tax induced
TABLE 19
IMPACTOF BTU TAXES ON NONENERGYPRICES AND QUANTITIES,1980 PERCENTAGECHANGEFROM BASE CASE
PRICE QtUANTITY
TAXRATE($/MILLION
BTU) 0.1 0.3 0.5 0.1 | .3 0.5
GROSS
OUTPUT:
AGRICULTURE 0.17 0.51 0.82 -0.18 0.53 -0.85
MANUFACTURING 0.16 0.50 0.82 -0.10 -0.30 -0.49
TRANSPORT 0.21 0.64 1.05 -0.17 -0.52 -0.84
SERVICES 0.06 0.22 0.34 -0.08 -0.22 -0.36
FINALDEMAND:
CONSUMPTION 0.27 0.86 1.34 -0.12 -0.33 -0.53
INVESTMENT 0.16 0.48 0.74 -0.11 -0.31 -0.51
GOVERNMENT 0.12 0.38 0.56 -0.08 -0.22 -0.36
GNP 0.23 0.69 1.07 -0.09 -0.26 -0.42
changesin nonenergyprices and quantitiesdemanded.All prices

are increasedas the effectsof the higherfuel pricesworkthrough
the productioncost structure. The processof substitution towards
the relativelyless expensiveinputslessens the impactof the fuel
price increaseson average costs,but the net effectis stillan up-
ward movementin costs,and in pricesin general.
The priceincreasesby sectorare in line withtheimportanceof
energyin the sector'sinputs: transportprices increase the most,
followed by agricultureand manufacturing, with service prices
risingthe least; this rankingis the same as the rankingof these
sectorsin termsof energyinput-output coefficients.The price in-
creasesare not,however,verysizeable. Even forthe $0.5 tax rate,
the price increasesrange from0.34 percentfor servicesto 1.05
percentfor transport.Similarly,the aggregateconsumptionprice
indexand the GNP pricedeflatorincreaseby onlyabout 1 percent
since the smallnonenergy pricerisesdominatethelargerfuelprice
increasesin theseprice indices.The quantitychangesinducedby
the energytax are correspondingly small. The new prices,and the
declinein real incomes,lead to a reductionand redirection of real
finaldemand,but the resultingchaingein total real consumption
and real GNP are verysmall,onllyof theorderof 0.5 percent.
Two alternativebases for the Btu tax were examined.These
were the cases in whichthe tax was levied onlyon finalconsump-
tionof energyand in whichthetax was leviedonlyon intermediate
inputsto the nonenergysectors.Both taxes do reducetotalenergy
input,the finaluse tax by 2.8 percentand the intermediate tax by
5.3 percentfora tax rate of $0.5 per million Btu. This compares
withthe 7.8 percentreductionforthe generaltax. Thus, although
the energyconservationimpactof a Btu tax diminishesas thebase
EDWARD A. HUDSON AND even a tax on one of the niarrowbases does lead to
is restricted,
506 / DALE W. JORGENSON nonnegligible cutbacksin energyconsumption.So, if politicalcon-

siderationswereto precludea finaluse tax,theintermediate
Btu tax
could stillplay an effective
role in an energypolicypackage.
D Importindependence.Our centralconclusionis thata Btu tax

can inducesignificant in energyconsumption,
reductions correspond-
ing to even largerrelativereductionsin fuelimports,at the cost of
comparatively minorchangesin productionpatterns,prices,or de-
mand.Our nextstepis to applytheseresultsto formulatea specific
Btu tax programthatwouldresultin importindependenceby 1985.
The tax rate requiredto reduce energyconsumptionin 1985 to a
level that requiresno fuel importsis $1.35 per millionBtu. The
effectsof thistax are summarizedin Table 20. The revenueyield
TABLE 20
IMPACT OF AN ENERGY INDEPENDENCE BTU TAX, 1985
TAX RATE ($/MILLION BTU) 0 1.35
TAX REVENUE ($ BILLION) 0 76.942
TOTAL ENERGY INPUT (QUADRILLION BTU) 105.326 88.244
PERCENTAGE CHANGE FROM BASE CASE -16.2
IMPORTS OF PETROLEUM (QUADRILLION BTU) 9.628 0.975
IMPORTS OF GAS (QUADRILLION BTU) 3.635 0
IMPORTS IN TOTAL INPUT (PERCENT) 12.6 1.1
FUEL CONSUMPTION (QUADRILLION BTU)

COAL 16.538 15.730
PETROLEUM 44.547 36.255
ELECTRICITY 11.499 10.780
GAS 28.835 21 .926
PERCENTAGE CHANGE IN FUEL CONSUMPTION FROM BASE CASE

COAL -4.89
PETROLEUM -18.61
ELECTRICITY -6.25
GAS -23.96
PERCENTAGE CHANGE IN PRICES FROM BASE CASE

COAL 49.15
PETROLEUM 42.20
ELECTRICITY 15.57
GAS 47.16
AGRICULTURE 1.78
MANUFACTURING 1.70
TRANSPORT 1.98
SERVICES 0.71
CONSUMPTION 2.41
GNP 2.04
of thistax is $76.9 billion.This is a substantialwithdrawalfromthe

privatespendingstreamand, unless returnedthroughotherpolicy
measures,would have a significant deflationaryimpact. This rev-
enue would be more than ample to sustaina major researchand
developmentefforton energysupply as well as to cover other
government spendingor to permitreductionsin othertaxes.
The reductionin energyuse is securedthroughthe effectof the POLICIES FOR ENERGY
tax in increasingfuel prices. In fact,a rise of around 40 percent EQUILIBRIUM / 507

in fuelprices,comparedto the base case, is requiredto obtainthe
necessarycutbackin energyuse. Averagecoal pricesare raisedby
49 percentby thetax,gas pricesare increasedby 47 percent,petro-
leumpricesby 42 percent,and electricity pricesby 15 percent.The
induced reductionsin fuel consumptionrange from5 percentfor
coal and 6 percentforelectricity, to 19 percentforpetroleum,and
24 percentfor gas. The total reductionin energyinput is 17.1
quadrillionBtu, whichis 16.2 percentof the base case level. This
reductioncorrespondsto a greaterreductionin energyinputper
dollar of Btu tax rate than emergedfromthe 1980 simulations.
The reason for this is the lags involved in responsesto higher
energyprices, particularlythe lags involved in the replacement
of capital stock withmore energyefficient capital.
These reductionsin fuel consumptionare greaterthan are
strictlynecessaryfor energyindependence.Coal and electricity
sufferno supplydeficitand reductionin theuse of thesefuelsdoes
notdirectlycontribute to theindependenceobjective.Gas use is cut
back substantially by the tax, by much more,in fact,than the 10
percentreductionthatwould be requiredto eliminategas imports.
Thus, althoughthe Btu tax does, fortuitously, induce conservation
primarilyin the two fuelswhose consumptionmustbe reducedif
the independenceobjectiveis to be achieved,it is comparatively
inefficient
in achievingthisobjective,forit is so broad in its effects
thatthe tax rate requiredto achieve petroleumindependencepro-
duces excessivelylarge reductionsin the use of otherfuels. The
applicationof a general instrument in pursuitof such a specific
objectiveresultsin unnecessaryeconomiccost. Since excess petro-
leum demandis the bindingconstraintin the independenceobjec-
tive,a specificpetroleumtax would be a moreefficient instrument.
The effects oftheenergytax on thenonfuelsectorsare notlarge.
Prices increaseby an average of only 2 percent,forthe large fuel
price increasesare dominated,in the consumptionand GNP price
indices,by thesmallerincreasesin thepricesof nonfuelgoods. The
inputsubstitution processes,describedabove, permitproductionto
accommodatethelargereductionsin energyinputand theincreases
in fuelpriceswithoutcorresponding decreasesin outputor increases
in totalcosts.
The specificratetimetableofa Btu taxthatwouldachieveenergy
independenceby 1985 is a variable.The ratestructure is subjectto
constraints,theratemustbe zero in 1974 and $1.35 per millionBtu
in 1985, but the path betweentheseend pointsis somewhatarbi-
trary.One possible rate timetable,withits associated macro-eco-
nomiceffects, is presentedin Table 21. But, iftheBtu tax program
were to be implemented,its rate structureshould satisfycertain
additionalconditions.Firstthetax mustbe regardedas a permanent
measure,for,in the absence of otherpolicies, continuedenergy
independencerequiresthatenergydemandcontinually be depressed
by taxes, and this will probablymean steadilyincreasingrates of
tax. Second, the ratelevel shouldbe increasedfairlyrapidlyto the
$1.35 level for,in view of the delaysin incorporating energycon-
servationmeasuresinto productionand finalconsumption,a high
EDWARD A. HUDSON AND tax rate over much of the 1974 to 1985 period would not only
508 / DALE W. JORGENSON induce substantialconservationbut would induce it early enough

TABLE 21
A BTU TAX FOR ENERGY INDEPENDENCE IN 1985
1975 1980 1985
BTU TAX RATE ($/MILLION BTU) 0 0.5 1.35

ENERGY INPUT (QUADRILLION BTU) 77.1 83.4 88.2
ENERGY IMPORTS (QUADRILLION BTU) 15.9 8.9 1.0
REVENUE FROM TAX ($ BILLION) 0 28.0 76.9
CONSUMPTION OF ENERGY (QUADRILLION BTU)
COAL 13.3 14.0 15.7
PETROLEUM 33.7 35.9 36.3
ELECTRICITY 6.6 8.7 10.8
GAS 24.7 23.7 21.9
PERCENTAGE CHANGE FROM ZERO TAX CASE
REAL CONSUMPTION 0 -0.53 -1.22
CONSUMPTION PRICE 0 1.34 2.41
REAL GNP 0 -0.42 -0.99
GNP PRICE DEFLATOR 0 1.07 2.04
forits fulleffectsto be feltby 1985. Third,it is desirablethatthe

rate structurebe knownforseveralyearsinto the futureso as to
reduce any economic incentivefor delayingenergyconservation
in the hope thatenergypriceswould fallin the future.
Our resultsshow thata Btu tax can induce sufficient fuelcon-
servationto secureenergyindependenceby themid-1980s.Further,
it suggeststhatthe cost of achievingthisis not catastrophic.But it
does not followthat this is the best or only means for securing
independence.Argumentscould be made for a policy mix that
stimulatedsupply expansion as well as demand reduction.Also,
arguments could be made fora mixof policieson thedemandside,
such as a Btu tax, regulationsrequiringbuildinginsulation,taxing
ofparticularlyheavyenergyuses,and so on. And it mightbe argued
thata generalpolicy,such as a Btu tax, is inefficient,
forit reduces
demandforall fuelswhenthe criticalproblemis evidencedonlyin
petroleum.More fundamentally, the desirabilityand definitionof
energyindependencecould be debated ad infinitum. Our results
beg the questionof underlying objectives,but theydo indicatethat
theBtu tax does providea meansof securingenergyindependence.
* We conclude witha briefoverviewof our methodology, com- 7. Conclusion

paringour framework forthe analysisof energypolicywithalter-
nativeapproaches.Our modelreplicateseach of thecomponentsof
the overalltransactionsflow-purchase of primaryinputs,sales of
goods and servicesbetweensectors,formationof productprices,
and purchaseof outputby finalusers. These aspects of economic
activityare broughtintoconsistency by meansof simulatedmarket
processes.All decision unitsreact to the same set of prices,and
pricesand quantitiesadjustso thatall marketsare clearedand each
productionsectorcoversits costs.The heartof the model lies in a
seriesof submodelsofproductionbehavior,one foreach of thenine
domesticproducingsectors.This set of productionrelationships
providesthe basic information used to determinerelativeoutput POLICIES FOR ENERGY
pricesand the corresponding set of inputpatterns. EQUILIBRIUM / 509

The sectoralproductionmodelsare based upon pricepossibility
frontiers.Withineach sector,the price frontierexpressesoutput
price in termsof the pricesof inputsand the productionefficiency
of thatsector.Each frontier containsfirst-and second-orderterms
so thatboththe averagerequirements foreach inputand the inter-
relationships amonginputsare captured.Thus, althoughthe speci-
ficationis in termsof prices, it captures the same information
concerninginput requirements, complementarities, and substitut-
abilitiesas the more traditionalproductionfunction.
The primaryinput prices are generatedwithinour macro-
econometric growthmodel.Productivities are exogenousto thepro-
ducer submodelsso the nine sectoraloutputpricescan be solved
fromthe nine price frontiers. The simultaneousdetermination of
prices permitsthe derivationof a set of prices for all produced
outputwhichnot onlytakes accountof productionconstraintsand
interrelationshipsand primaryinputprices,but also integratesall
these price determinants into a consistentframeworkso that all
sectorsare simultaneously chargingthe minimumprice thatcovers
all theircosts,includinga returnto capital. In short,givenprimary
inputpricesand underlying productioninformation, themodelfinds
the equilibriumprice systemforthe economy.
This approachto pricesand productionalso permitsthe input
patternfor each sectorthat is best suitedto the prevailingset of
pricesand coststo be chosenfromthe infinity of patternsthatare
possible. Thus, producerscan react to the prevailingstructureof
relativeprices by adjustingtheirinputpatternsand substituting,
withinthe limitsset by the complementarity and substitutability
information containedin thepricefrontiers, relativelyless expensive
forrelativelymore expensiveinputs.In thisway, a criticalfeature
of the economy,the responseof inputpatternsto prices,is sys-
tematically includedin our model.This featureof themodelis very
importantfroma practicalpoint of view in accommodatingthe
detailedoperationof thepricesystem.Conceptually,it freesinput-
outputanalysisfromthe assumptionof fixedcoefficients, and ex-
tends input-outputanalysis by making the coefficients variable
and by makingthemfullyendogenousand linkingthemto price
behavior.
Afterthe analysisof productionrelationshipshas been com-
pleted,the nextstep in implementing our model is to examinethe
componentsof finaldemand. These componentsare producedby
threefinaldemand submodels.The initialinputsinto these sub-
modelsare thepriceschargedfortheoutputof each of thedomestic
producingsectors,the pricesof primaryinputsthatenterdirectly
into finaluse, and the total currentdollar expenditures in threeof
the finaldemandcategories-personalconsumption, privateinvest-
ment, and governmentpurchases. These expendituretotals are
produced by the use of our macro-econometric model of U. S.
economic growth.Our growth model provides levels of relative
prices of consumption,investment, capital, and labor withinthe
frameworkemployedto generatefinaldemandin real terms.The
model representsa major extensionof macro-econometric model
EDWARD A. HUDSON AND buildingto incorporateelementsof both aggregatedemand and
510 / DALE W. JORGENSON aggregatesupply.

We begin with the set of prices that is consistentwith equi-
libriumdemandand supplyand withthelevelsof pricesof primary
inputs.We findthe patternof input-output coefficients associated
withthisprice regime.We determinethe level and compositionof
finaldemandthatare associatedwiththeseprices.The input-output
coefficientshave been determined already,so thebalance equations
of input-output analysisare sufficient to find,in constantdollar
terms,the total sectoraloutputsand the patternof industrypur-
chases and sales necessaryto sustainthe finaldemand. This step
imposesa finalsetof marketclearingrelationships on our simulated
economywiththe conditionof equalitybetweenthe real demand
and supplyof everycommodity'sbeing added to the conditionof
equalitybetweenvalue of demand and supplyand of equalitybe-
tweenreceiptsand expendituresforeverysector.
The outputfromthe interindustry model comprisesprices for
each of the supplyingsectors,thematrixof constantdollartransac-
tionsfortheentirestructure, and,by combiningthesetwo elements,
the matrixof currentdollartransactions. The transactions matrices
cover the whole economicstructure-energyas well as nonenergy
sectors.The energyinformationcontained in these transactions
matricesis already extensive,coveringboth volumes and prices.
It can readilybe extended,however,to produce the data forms
traditionally used in energyanalysis-energyflowsin Britishther-
mal units,energyflowsin physicalunits,and energypricesin terms
of physicalunits.This furtherinformation for Btu's can be gen-
eratedby insertingknownvalues of the Btu contentper constant
dollar of each fuel,the volume in physicalunitscan be obtained
by usingknownphysicalunitsper constantdollar ratios,and fuel
pricescan be generatedby applyingthe base periodpricesto the
price indicessimulatedin the model.
We concludethisoverviewof our framework forenergypolicy
analysis by comparing the conceptual properties of our model with
thoseof the traditional energy balance approach to energy analysis.
The fundamental advantage of our approach is that, rather than
viewingenergy in isolation,we view it as one of the many interact-
ing partsthatmake up the economicsystem.This perspectiveper-
mitsthe systematic analysisof all the factorsthatinfl-uence energy
on bothdemandand supply sides and, equally important, it permits
the explicitlinkageof energydevelopments to thosevariablessuch
as employment, incomes,and consumption, that are the ultimate
ends to whichenergyuse is onlya means.
More specifically, our model incorporatesthe influenceof fuel
priceson the level and compositionof energyuse and, further, it
incorporatesthe effectsof the level and patternof nonenergy
activityon energyuse as well as thereverselinkageof energyprices
and supplies to nonenergyprice input,output,and consumption
patterns.These interrelationships are criticaland it is essential,for
both forecastingand policy purposes,to recognizethem. Some
examplesof theselinkagesare the severeimpactof the recentoil
shortageson the outputof and the incomesgeneratedby the auto-
mobileand touristindustries, theimplications forenergyuse of the
secular trendof demand towardsserviceactivities,and the econ- POLICIES FOR ENERGY
omiesin fueluse inducedby therecentincreasesin fuelprices. EQUILIBRIUM / 511

One aspect of theselinkagesin whichour model representsa
particularly importantadvance over energybalance proceduresis
the variationof inputpatternsin responseto relativeprices. This
is of greatimportancein energyanalysisin view of the widespread
abilityto substitutebetweenfuels,for example betweencoal and
oil in electricitygeneration,between oil and gas in industrial
heating,betweengas and electricity in home cooking,and so on.
This substitution is not merelya matterof switchingfuels,forthe
associatedcapital stockmustalso be changedto permitthe use of
a different fuel. Our productionmodels, by treatingall inputs
simultaneously, take account of the possibilitiesforboth interfuel
substitutions and substitutionsof fuelfornonfuelinput,but do this
in such a way that the constraintsimpliedby complementarities
betweeninputsare recognized,so thata consistentanalysisof the
entireinputpictureis obtained.
Our investigation of the effectsof a Btu tax servesto demon-
stratethe usefulnessof our framework for energypolicy analysis.
The basic propertiesof the model are illustratedby the result
that,in the 1980 simulationsfor example, energyinput can be
reduced by 8 percent at the cost of only a 1-percentincrease
in average prices and a 0.4-percentdecrease in real income.
In other words, the flexibilityof the economy in adapting to
changingresourceavailabilities,and the power of the price sys-
tem in securingthis adaptation, mean that substantialreduc-
tions in energyuse can be achieved withoutmajor economic
cost. The analyticalpropertyof our model that incorporatesthis
flexibilityis the endogenousformationof prices and the endo-
genous determination of the responseof productionpatternsand
finaldemand to these prices. Also the integrationof the various
componentsof themodelby meansof interindustry analysissecures
an overall consistencyin the simulationof the marketprocess.
These features,permitting priceformation and the reactionof pro-
ducersand consumersto pricechanges,combinedin a simultaneous
model of the entire economy,representa major advance over
traditionalinterindustry and energybalance analysis.
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514 / DALE W. JORGENSON


Hudson 1974

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U. S.

Energy Policy and Economic Growth, 1975-2000

This content downloaded from 147.8.31.43 on Sat, 5 Oct 2013 21:31:03 PM

This paper presentsa new approachto the quantitativeanalysisof

* The dramaticincreasein worldpetroleumpricesassociatedwith 1. Introduction

Dale W. Jorgenson receivedtheB.A. fromReed College (1955), and the

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(I) agriculture,nonfuelmining,and construction

Our interindustry modelincludesa modelof demandforinputsand

A recentcompendiumof researchon input-output analysisis Carterand

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4 In the Klein-Goldberger model the determination of prices can be

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2. Interindustrymodel * The firstcomponentof ourframework forenergypolicyanalysis

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131 TOTAL INPUT

Our interindustry model consistsof balance equationsbetween

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6 Energyimportsare significant only for crude and refinedpetroleum

This content downloaded from 147.8.31.43 on Sat, 5 Oct 2013 21:31:03 PM

D Interindustrytransactions.We firstdescribe our model of

XI= XIJ + Yl, (I=--1, 2... 9). (1)

In addition,the model includesaccountingidentitiesbetweenthe

PIPXI PJ XJI + PK KI + PL*LI + PRI*RI, (2)

This content downloaded from 147.8.31.43 on Sat, 5 Oct 2013 21:31:03 PM

(1) a model givingthe price of outputas a functionof prices

whereAJI is the input-output

7 For a detailed interpretationof the price possibilityfrontier,see

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For each industry we derivethe input-output coefficientsin two

9 For furtherdiscussionof the model of producerbehavior,see Section

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This content downloaded from 147.8.31.43 on Sat, 5 Oct 2013 21:31:03 PM

The values of personal consumptionexpendituresPC*C, gross

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P1 is thepriceof theIth commodity,

EDWARD A. HUDSON AND 11 For a detaileddiscussionof the indirect see Christen-

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A2AIP"XJ + CI + II + GI + ZI, (I -1, 2 . .. 9).

A91 A92 ... A99

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3. Producer behavior * Our interindustrymodel includeseconometricmodels of pro-

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and Lau [17].

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laIL + ?1, + ?IEl + PIlIL 0 (18)

I?K11 + PL 1 + PEN + 31j113 0,

(I-1, 2 ... 9).

1?IK -tPKK PLK PEKI

P311 -KL PLL PTELIT

POLICIES FOR ENERGY

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+ a-,"'In PM4 + acII In PM5 (22)

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D Parameterestimation.For each of the nine industrialsectors

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a I 0.0244 0.0202 0.0380 0.0182 0.1857 0.1101 0.4553 0.2120 0.5547

I | -0.0052 -0.0055 -0.0137 0.0011 0.0099 -0.0470 -0.0772 -0.1682 -0.0941

A I | 0.0072 0.0188 0.0198 0.0020 0.0087 0.0184 0.2282 0.0638 0.1413

1M 0.0422 0.1573 -0.0038 0.1907 0.1392 0.1635 0.0685 -0.1311 -0.2219

18 These data werecompiledbyJackFaucettAssociates[21].

PIPXI PJ XJI + PK KI + PLLI + PRIRI, (2)