Abstract
To reflect on recent trends in model building based on microeconomic theory, a new modeling method in the input-output model in which the behavior of all economic agents is described according to optimization is presented. This approach is incorporated into the construction of an interregional economic model in the Japanese economy. Thus, intermediate demand, consumption expenditure, labor demand and price determination are endogenized in an interregional system where: a) consumption expenditure is explained by the Almost Ideal Demand System in which expenditure minimization is a key factor; b) intermediate and labor demands are derived from the generalized Ozaki cost function; and, c) sector price is determined by an monopolistic market. This interregional system is incorporated into an interregional input-output model of nine regions. The performance of the model was estimated using eight data points collected in five-year increments from 1965 to 2000. The final section of this paper demonstrates the model's performance.
JEL Classification: C67, D57, R15
