The Input Output Analysis

The

Input-output model

of economics uses amatrixrepresentation of a nation's (or a region's) economy to predict the effect of changes in oneindustry on others and by consumers, government, and foreign suppliers on the economy.Wassily Leontief (1905-1999) is credited with thedevelopment of this analysis.The International Input-Output Association is dedicated to advance knowledge in the field input-output study, which includes "improvements in basicdata, theoretical insights and modeling, and applications, both traditional and novel, of input-output techniques."Input-output depicts inter-industry relations of an economy. It shows how the output of one industry is an input each other industry. Leontief putforward the display of this information in the form of a matrix. Inputs typically are enumerated in the column of an industry. And its outputs areenumerated in its corresponding row. This format, therefore, shows how dependent each industry is on all others in the economy both as customer of their outputs and as supplier of their inputs. Each column of the input-output matrixreports the monetary value of an industry's inputs and each row represents the value of an industry's outputs. Suppose there are three industries. Column 1 reports the value of inputs to Industry 1 from Industries 1,2, and 3. Columns 2 and 3 do the same for those industries. Row 1 reports the value of outputs from Industry 1 to Industries 1, 2, and 3. Rows 2 and 3do the same for the other industries.While most uses of the input-output analysis focuses on the matrix set of inter-industry exchanges, the actual focus of the analysis from the perspective of most national statistical agencies, which produce the tables, is the benchmarking of gross domestic product.Input-output tables therefore are an instrumental part of national accounts. As suggested above, the core input-output table reports only intermediategoods and services that are exchanged among industries.But an array of rowvectors

, typically aligned below this matrix, record non-industrial inputs by industry like



Payments for labor;



Indirect business taxes;



Dividends, interest, and rents;



Capital consumption allowances (depreciation);



Other property-type income (like profits); and purchases from foreign suppliers (imports).At a national level, although excluding the imports, when summed this is called "gross product originating" or "gross domestic product by industry."Another array of columnvectorsis called "final demand" or "gross product consumed."This displays columns of spending by households, governments, changes in industry stocks, and industries on investment, as well as net exports. Inany case, by employing the results of an economic census, which asks for the sales, payrolls, and material/equipment/service input of eachestablishment, statistical agencies back into estimates of industry-level profits and investments using the input-output matrix as a sort of double-

accounting framework. The mathematics of input-output economics is straightforward, but the data requirements are enormous because theexpenditures and revenues of each branch of economic activity have to be represented. As a result, not all countries collect the required data and dataquality varies, even though a set of standards for the data's collection has been set out by the United Nations through its System of National Accounts(SNA): the replacement for the current 1993 SNA standard is pending. Because the data collection and preparation process for the input-outputaccounts is necessarily labor and computer intensive, input-output tables are often published long after the year data was collected--typically as muchas 5-7 years after.

Usefulness

In addition to studying the structure of national economies, input-output economics has been used to study regional economies within a nation, and asa tool for national and regional economic planning. Indeed, it may well be that a main use of input-output analysis is that for measuring the economicimpacts of events as well as public investments or programs. But it is also used to identify economically related industry clusters and also so-called"key" or "target" industries--industries that are most likely to enhance the internal coherence of a specified economy. By linking industrial output tosatellite accounts articulating energy use, effluent production, space needs, and so on, input-output analysts have extended the approaches applicationto a wide variety of uses.

Key Ideas

Leontief's seminal test remains one of the best expositions of input-output analysis. Nonetheless, two books--a rather fundamental one by WilliamMiernyk and another by the duo Ronald E. Miller and Peter D. Blair--probably have greater international currency. The latter is presently beingrewritten and re-released, this time by Cambridge University Press. See bibliography.Input-output concepts are simple. Consider the production of the ith sector. We may isolate (1) the quantity of that production that goes tofinal demand,

c

i

, (2) to total output,

x

i

, and (3) flows

x

ij

from that industry to other industries. We may write a transactions tableau

Table: Transactions in a Three Sector EconomyEconomic ActivitiesInputs to AgricultureInputs to ManufacturingInputs to TransportFinal DemandTotal Output

Agriculture51526890Manufacturing1020104080Transportation10155030Labor25305060

Note that in the example given we have no input flows from the industries to 'Labor'.We know

very little

about production functionsbecause all we have are numbers representing transactions in a particular instance (single points onthe production functions):Theneoclassicalproduction function is an explicit function

Q

=

f

(

K

,

L

),Where

Q

= Quantity,

K

= Capital,

L

= Labor, And the partial derivatives (

) are the demand schedulesfor input factors.Leontief, the innovator of input-output analysis, uses a special production function which depends

linearly

on the total output variables

x

i

. UsingLeontief coefficients

a

ij

, we may manipulate our transactions information into what is known as an input-output table:Introducing matrix notation, we can see how a solution may be obtained. Let Denote the total output vector, the final demand vector, the unit matrix and the input-output matrix, respectively. Then:Provided (

I

−

A

) is a regular matrix which can thus be inverted.