Effects of changes in the structure of final demand on economic activity in Croatia

Commissioned by: Croatian Chamber of Economy
Project duration: January 10, 2022 – October 10, 2022 
Project manager: Davor Mikulić, 
Collaborators: Željko Lovrinčević, Maruška Vizek, Damira Keček

Summary:
The aim of the project was to estimate the effects of the change in the structure of final demand on gross value added, employment and tax revenues of the Croatian economy and economic sectors. By buying a domestic, instead of imported product of the comparable price and quality, the final consumer contributes to the Croatian economic activity. Domestic producer who delivers the final product generates direct revenues and value added. Depending on the technology applied, the producer of the final product further increases the demand for intermediate inputs that are incorporated into the final product, and indirectly increases revenues and value added of other domestic companies included in the production chain. Those effects are called multiplicative effects. The total indirect effects related to the delivery of domestic products on the total economy can be analytically estimated by the input-output model. In addition to indirect effects on intermediate input suppliers, the input-output model can also determine the effects of induced personal consumption financed by an increase in income of employees who directly or indirectly participate in the production of final products. Multiplicative effects are also present in terms of employment and tax revenues. Effects of the change in the structure of final demand in favor of domestic products were estimated for total Croatian economy and 64 economic sectors. Detailed analysis of effects allowed focusing on the benefits of buying domestic products, at the expense of imports, on the sectoral level. In addition to the effects of final expenditure substitution, the analytical model included the potential effects of better integration of domestic producers, creation of clusters and value added chains, which could increase the competitiveness of Croatian producers and lead to the substitution of imported intermediate inputs by the domestic products.