The relevance of input substitution in the inter-industry model

Using 17 annual input-output tables of the Maltese economy, this study examines the effect of input prices on input-output coefficients. The Leontief production function is substituted by the generalised Leontief cost function and input demand functions are derived. The empirical result that 56 percent of these derived input demand functions have a relative price variable which is significant indicates that, in general, the Leontief specification is rejected in favour of the generalised Leontief form used in this study. This result, along with a marked improvement in forecasting ability, suggests that this modification of the traditional Leontief specification is worthwhile.