Math 547
Research Project
Minju Kim
Leontief InputOutput Model
(Application of Linear Algebra to Economics)
Introduction
Professor Wassily Leontief started inputoutput model with a
question !what le"el of output should each of the n industries
in an economy produce in order that it will just #e sufficient to
satisfy the total demand for that product$% Leontief &nput
output analysis which was de"eloped #y Professor Wassily
Leontief in the '()*+s is a method used to analy,e the
relationships #etween sectors in an economy .hese sectors are
interdependent on the other sectors in the economy &n order to
produce somethin/ each sector needs to consume of its own
output and some of output from the other sectors 0e de"eloped the models to model economies
usin/ empirical data 0e di"ided 12 economy into 5** economic sectors and descri#ed the
interdependence #etween sectors with inputoutput matrices With inputoutput model it #ecame
possi#le to determine the total output of industries that must #e produced to o#tain a /i"en
amount for final demand 3y usin/ the Leontief &nputoutput Model it is possi#le to find
production le"els which will meet the demands of all sectors inside and outside of that economy
4n 4cto#er '5 in '(7) Wassily Leontief won 6o#el Pri,e in economy for this wor7 in this area
.his analysis has #een used e8tensi"ely in economic production plannin/ and in de"elopin/
countries 9lso #y loo7in/ at the Leontief &nput 4utput Model it is possi#le to tell whether an
economy is producti"e or nonproducti"e
Assumptions for the InputOutput Model
2ince Leontief inputoutput model normally can ha"e a lar/e num#er of industries and it will #e
quite complicated :or a simplification the followin/ assumptions are adopted
1) ;ach industry produce only one homo/eneous commodity
2) ;ach industry uses a fi8ed input ratio for the production of its output
3) Production in e"ery industry is su#ject to constant return to scale <constant returns to
scale means 7fold chan/e in e"ery input will result in an e8actly 7fold chan/e in output=
2
Using of Linear Algebra for the Model
.he Leontief model represents the economy as a system of linear equations .o find P
<production "ector= in terms of d <demand "ector= we will sol"e sets of linear equations 2uch
equations are naturally represented usin/ the formalism of matrices and "ectors We will sol"e
linear equations with matri8 al/e#ra &n matri8 al/e#ra we will use matri8 in"erses and matri8
multiplication 9lso to find a solution we will use >aussianelimination technique .o decide if
the economy is producti"e we will use the 0aw7ins2imons conditions
The Open Leontief Model
.here is a ?losed Leontief Model where no /oods lea"e or enter the economy 0owe"er in real
economic world it does not happen "ery often 6ormally a certain economy has outside demand
from li7e /o"ernment a/encies .herefore we will use the 4pen Leontief Model &n 4pen
Leontief Model there are industries in an economy ;ach industry has a demand for products
from other industries <internal demand= 9lso there are e8ternal demands from outside We will
find a production le"el for the industries that will satisfy #oth internal and e8ternal demands
?onsider there are n interdependent industries <or sectors=@ 2' 2AB2n
Let m
ij
@ the num#er of units produced #y industry 2i to produce one unit of industry
2i P
7
@ the production le"el of industry 2
7
m
ij
p
j
@ the num#er of units produced #y industry 2i and consumed #y industry
2
j
d
i
@ demand from the i
th
outside industry
.hen total num#er of units produced #y industry 2
i
p
iC
p
'
m
i'
D p
A
m
iA
D B D p
n
m
in
D d
i
:rom this we can /et linear equations
p
'
C m
''
p
'
D m
'A
p
A
D B D m
'n
p
n
Dd
'
p
A
C m
A'
p
'
D m
AA
p
A
D B D m
An
p
n
D d
A
: : : : :
p
n
C m
n'
p
'
D m
nA
p
A
D B D m
nn
p
n
Dd
n
We can ha"e matri8 9 and "ectors P and d
( ) ( ) ( )
9 C [
(
) ( ) (
)
]
PC [ ] and dC[ ]
( ) ( ) ( )
We can write a#o"e linear equations as P C 9P D d
Matri8 9 is called inputoutput matri8 or consumption matri8 9 consumption matri8 shows the
quantity of inputs needed to produce one unit of a /ood .he rows of the matri8 represent the
3
producin/ sector of the economy .he columns of the matri8 represent the consumin/ sector of
the economy .he entry m
ij
in consumption matri8 represent what percent of the total
production "alue of sector j is spent on products from sector i d is the demand "ector Eemand
"ector d represents demand from the nonproducin/ sector of the economy Fector P represents
the total amount of the product produced
P C 9P D d G [ ] C [ ] D [ ]
.o sol"e this linear system
P C 9P D d H <& I 9=P C d H P C <&9=
'
d
&f consumption matri8 9 and demand "ector d ha"e nonne/ati"e entries and if consumption
matri8 9 is economically feasi#le then the in"erse of the matri8 <&?= e8ists and the production
"ector P has nonne/ati"e entries and has the unique solution for the model We call matri8 9 is
producti"e in this case
The Open Leontief Model ith !eal "ata
.o help understandin/ how the 4pen Leontief Model wor7s & ha"e a real data to e8plain
9/riculture Manufacturin/ 2er"ices 4pen 2ector
9/riculture )4J( 4(A 5JA )(A4
Manufacturin/ 5A5 J'A5 AA(( J**A
2er"ices '*45 A5(5 4A*) ')*J5
.otal >ross 4utput 545J 'J)4) A'(*)
K;8chan/e of >oods and 2er"ices in the 12 for '(47 <in #illions of '(47 dollars=L
3y di"idin/ each column of a ) M ) ta#le #y the .otal >ross 4utput for sectors we can /et the
consumption matri8 from the ta#le
&n this data open economy consists of three industries@ 9/riculture Manufacturin/ 2er"ices
.hese three industries depend upon each other .o produce N' of 9/riculture 9/riculture must
purchase N*4'*A of its own production N**JA4 of Manufacturin/ and N*'A)J worth of
2er"ices .o produce N' worth of Manufacturin/ it needs N**)*' of 9/riculture N*)75) of
Manufacturin/ and N*'555 of 2er"ices .o produce N' worth of 2er"ices 2er"ices industry
must #uy N**A57 of a/riculture N*'*5* of Manufacturin/ and N*'('( of 2er"ices .here is an
e8ternal demand of N)(A4 worth of 9/riculture NJ**A worth of Manufacturin/ and N')*J5
worth of 2er"ices We can find the production le"el of each three industries with the 4pen
Leontief Model to satisfy #oth internal and the e8ternal demands
4
#olution for !eal "ata using the Open Leontief Model
.he inputoutput matri8 <or consumption matri8= of the economy is
9 C [ ] 
Matri8 9 is showin/ relationships of inputs consumed per unit of sector output
;8ternal demand for the economy is d C [ ]
P C <& I 9=
'
d
& I 9 C [ ]
.o find out <& I 9=
'
first we need to 7now if in"erse of <&9= e8ists
&n )8) matri8 3 C [ ]
.here e8ists an in"erse of matri8 3 det3 C #
''
#
AA
#
))
D#
A'
#
)A
#
')
D#
)'
#
'A
#
A)
#
''
#
)A
#
A)
#
)'
#
AA
#
')

#A'#'A#)) * and it is
3
'
C
[ ]
2ince det<&9=C*55(5O*JA'7O*5*5'D*()7JO*54'AO*(74)D*57J4O*(J((O*5(5*
*55(5O*54'AO*5(5**57J4O*JA'7O*(74)*()7JO*(J((O*5*5'C*''575AP* there e8ists
an in"erse of matri8 <&9=
<& I 9=
'
C [ ]
P C <& I 9=
'
d C [ ] [ ] C [ ]
.herefore the total output of the 9/riculture must #e N5A4* .he total output for the
Manufacturin/ must #e N')555 .he total output for the 2er"ices sector is NA*'57
5
4r we can /et a production "ector usin/ the >auss elimination method
Q &n"erti#ility
9n n 8 n matri8 ? is in"erti#le if <and only if= rref <?= C
&n or equi"alently if Ran7<?= C n
[ ] C
[ ] G[ ]
G[ ] [ ]
) 8 ) matri8 <&9= is in"erti#le since rref <&9=C &
)
and Ran7<&9=C ) 2o in"erti#le matri8 of
matri8 &9 e8ists .herefore we can /et <& I 9=
'
C [ ]
Which /i"es P C <& I 9=
'
d C [ ] [ ] C [ ]
$haracteristics on $onsumption Matrices A in Open Leontief Model
&n the ?losed Leontief Model where no /oods lea"e or enter the economy consumption matrices
would ha"e columns addin/ to one 0owe"er in the 4pen Leontief Model the sum of columns
in consumption matri8 must #e less than ' &n a real data used a#o"e a consumption matri8 9 C
[ ] We can chec7 that the sums of each column are less than ' <.he
sum of first columnC *4'*AD**JA4D*'A)JC*5(JA K ' the sum of second columnC
**)*'D*)75)D*'555C*5J7A K ' the sum of third columnC
**A57D*'*5*D*'('(C*)AAJ K'= 2ince sums of each column represent the partial input
cost incurred in producin/ a dollar+s worth of some commodity &f the sum is /reater than or
equal to N' production will not #e economically justifia#le
?oefficients of the consumption matri8 must #e positi"e &n order to meet demand there are
certain restrictions in 4pen Leontief Model :irst the equation that is #ein/ sol"e is
P C <& I 9=
'
d &f an in"erse does not e8ist then it is impossi#le to sol"e for the production "ector
9lso a positi"e production "ector is necessary 3ecause the demand "ector is always positi"e
multiplyin/ the demand #y the in"erse of &9 needs to result in a positi"e production "ector :or
this <&9=
'
needs to #e a positi"e definite matri8 With #asic economic 7nowled/e an increase
6
Rd L * in final demand in equation P C <& I 9=
'
d should result in an increase RP L * in total
output .herefore if the matri8 <& I 9=
'
is not positi"e the lo/ic is "iolated
3ein/ a positi"e definite matri8 <<& I 9=

'= assures that the economy can meet any /i"en
demand When this happens consumption matri8 9 and the economy are called producti"e
Is the Econom% &roducti'e(
6ow we 7now that e8istence of positi"e definite matri8 <<& I 9=

'= tells us consumptions matri8
9 and the economy are producti"e .o chec7 if the economy is producti"e we will try to find out
that in"erse of matri8 <& I 9= is a positi"e definite matri8 :or this we will use the 0aw7ins
2imons conditions
Q .he 0aw7ins2imons conditions say
H &f all the principal leadin/ minors of a matri8 are positi"e then an in"erse e8ists and
is nonne/ati"e
.he principal leadin/ minors of a matri8 are set of determinants from su#matrices of a certain
matri8 &n the 4pen Leontief &nput4utput Model they come from <& I 9= .he principal leadin/
minors start with the determinant of the entry which is left after e"ery row e8cept the first is
omitted and e"ery column e8cept the first is omitted .he second principal leadin/ minor
e8cludes e"ery row past the second and e"ery column past the second 1ntil the determinant of
the entire matri8 is ta7en this pattern needs to continue
:or e8ample in a matri8
[ ]
.he first principal leadin/ minor@ the determinant of a'' or Sa''S .he second principal
leadin/ minor@   .he third principal leadin/ minor@   &t will
continue until the last principal leadin/ minor that is the determinant of the matri8
&f all these principal leadin/ minors are positi"e a matri8 is in"erti#le and positi"e definite 9lso
it means that a production "ector P satisfies any demand and the economy is producti"e
1 E)amples of &roducti'e Economies
Let+s suppose that there is consumptions matri8 9 in an open economy 9C[ ] We
can chec7 that the sums of the columns are less than ' &t means that the industries require few
inputs to ma7e output and most output will #e sent to satisfy an outside demand
7
& I 9C [ ] .he first principal leadin/ minor is *( and it is positi"e .he second
leadin/ minor is *(O*(*5O*(C**( and it is positi"e .he third leadin/ minor is
*(O*(O*(D*5O*JO*7D*7O*(O*5*7O*(O*7*(O*JO*5*5O*(O*(C**45 and it is
positi"e num#er We chec7 that all of principal leadin/ minors are positi"e 2o we can 7now
that & I 9 is in"erti#le and positi"e #y 0aw7ins2imons conditions .herefore it means that it
can meet any demand and the economy is producti"e
Approaches to Anal%sis: Multipliers
&f there is chan/e in final demand how does it affect to total output or total factor use$ Multiplier
analysis is widely used to analy,e the impact of chan/es in final demand on total output or total
factor use
Let+s assume that there is a chan/e in final demand <Rd= 2o the final demand is chan/ed d to d
D Rd .he Rd can #e positi"e ,ero or ne/ati"e We can /et <P D RP= C 9<P D RP= D <d D Rd=
which is sum of PC 9PDd and RP C 9RPDRd 2ol"in/ for RP we /et RPC<&9=
'
Rd
2ince the matri8 <& I 9=
'
is positi"e if Rd L * then RP L * 3ecause industries on an economy
depend on each other the chan/e of final demand of one commodity will cause a chan/e in
output :or e8ample if there is a positi"e chan/e of final demand of commodity i while all other
final demand of commodities remains same cause increase of production .herefore all
industries ha"e to increase their production and increase in factor used can #e o#tained
8
!eferences
1) .he Leontief &nput4utput Model We# Retrie"ed from
http@TTwwwpersonalpsueduT7es)ATMichi/an?lassesTmathA'7TWor7sheetsATleontiefpdf
2) Kallem 6icholas &nput4utput 9nalysis with Leontief Models We# Retrie"ed from
http@TThomeAf"cceduTUdhic7ethTLinear9l/e#raTstudentprojectsTsprin/A**JTnicholas7alle
mTLeontiefVA*projecthtm
3) ?hian/ 9lpha Leontief &nput4utput Models We# Retrie"ed from
http@TTwwwdocstoccomTdocsT'A(5*))*5T:rom?hapter59lpha?hian/:undamental
MethodsofMathematical
4) Euchin :aye Rensselaer Polytechnic &nstitute Eepartment of ;conomics We#
Retrie"ed from http@TTwwweconomicsrpieduTwor7in/papersTrpi*J'*pdf