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(Lecture 12)

Leontief Input-Output Analysis

the analysis of the so-called input-output model - a model that

describes how the input and output of different industries affect

each other. The theory involves the extensive use of matrices.

Two-Industry Model

The following is a description of a two-industry model:

I We have two industries, electric company E and water

company W. Output for both companies is measured in

dollars.

Two-Industry Model

The following is a description of a two-industry model:

I We have two industries, electric company E and water

company W. Output for both companies is measured in

dollars.

I The electric company uses both electricity and water (input)

in the production of electricity (output), and the water

company uses both electricity and water (input) in the

production of water (output).

Two-Industry Model

The following is a description of a two-industry model:

I We have two industries, electric company E and water

company W. Output for both companies is measured in

dollars.

I The electric company uses both electricity and water (input)

in the production of electricity (output), and the water

company uses both electricity and water (input) in the

production of water (output).

I Suppose that the production of each dollars worth of

electricity requires $0.3 worth of electricity and $0.1 worth of

water, and the production of each dollars worth of water

requires $0.2 worth of electricity and $0.4 worth of water.

Two-Industry Model

The following is a description of a two-industry model:

I We have two industries, electric company E and water

company W. Output for both companies is measured in

dollars.

I The electric company uses both electricity and water (input)

in the production of electricity (output), and the water

company uses both electricity and water (input) in the

production of water (output).

I Suppose that the production of each dollars worth of

electricity requires $0.3 worth of electricity and $0.1 worth of

water, and the production of each dollars worth of water

requires $0.2 worth of electricity and $0.4 worth of water.

I The final demand from the outside sector of the economy is

$12 million for electricity and $8 million for water.

Two-Industry Model

The following is a description of a two-industry model:

I We have two industries, electric company E and water

company W. Output for both companies is measured in

dollars.

I The electric company uses both electricity and water (input)

in the production of electricity (output), and the water

company uses both electricity and water (input) in the

production of water (output).

I Suppose that the production of each dollars worth of

electricity requires $0.3 worth of electricity and $0.1 worth of

water, and the production of each dollars worth of water

requires $0.2 worth of electricity and $0.4 worth of water.

I The final demand from the outside sector of the economy is

$12 million for electricity and $8 million for water.

Question: How much electricity and water should be produced to

meet this final demand?

MATH 1003 Calculus and Linear Algebra (Lecture 12)

Solution to Two-Industry Model, Part 1

of E and W respectively because the input of E and W, which we

call the internal demand, is needed in order to produce the final

demand. Therefore, for both E and W,

Solution to Two-Industry Model, Part 2

I $0.3 of E and $0.1 of W generates $1 of E, and

I $0.2 of E and $0.4 of W generates $1 of W.

Solution to Two-Industry Model, Part 2

I $0.3 of E and $0.1 of W generates $1 of E, and

I $0.2 of E and $0.4 of W generates $1 of W.

I $0.3x1 of E and $0.1x1 of W generates $x1 of E, and

I $0.2x2 of E and $0.4x2 of W generates $x2 of W.

Hence,

I the internal demand of E is $(0.3x1 + 0.2x2 ), and

I the internal demand of W is $(0.1x1 + 0.4x2 ).

Solution to Two-Industry Model, Part 3

(

x1 = 0.3x1 + 0.2x2 + 12

x2 = 0.1x1 + 0.4x2 + 8

Solution to Two-Industry Model, Part 3

(

x1 = 0.3x1 + 0.2x2 + 12

x2 = 0.1x1 + 0.4x2 + 8

0.3 0.2 x1 12

M= , X = , D=

0.1 0.4 x2 8

X = MX + D

Solution to Two-Industry Model, Part 4

X MX = D

IX MX = D

(I M)X = D

X = (I M)1 D

That is to say, we need to compute the inverse of I M in order

to solve the system.

Solution to Two-Industry Model, Part 5

1 0 0.3 0.2 0.7 0.2

I M = =

0 1 0.1 0.4 0.1 0.6

3 1

0.6 0.2

(I M)1 = 1

0.4 = 2

1

2

7

0.1 0.7 4 4

3 1

2 2 12 22

Therefore, X = 1 7 =

4 4 8 17

Hence,

I the total output of E is $22 million, and

I the total output of W is $17 million.

General Two-Industry Model

Suppose that we have two industries, A and B.

I The production of each dollars worth of A requires $m11

worth of A and $m21 worth of B.

I The production of each dollars worth of B requires $m12

worth of A and $m22 worth of B.

I The final demand from the outside sector of the economy is

$d1 million for A and $d2 million for B.

Let x1 and x2 be the total output from A and B respectively, then

we have

x1 m11 m12 d1

X = MX + D, X = ,M= ,D= .

x2 m21 m22 d2

If I M is invertible, then the solution for X is given by

X = (I M)1 D.

We call D the final demand matrix, X the output matrix and M

the technology matrix.

MATH 1003 Calculus and Linear Algebra (Lecture 12)

Three-Industry Model, an Example

and manufacturing (M).

I Production of a dollars worth of agriculture requires an input

of $0.2 from the agriculture sector and $0.4 from the energy

sector.

I Production of a dollars worth of energy requires an input of

$0.2 from the energy sector and $0.4 from the manufacturing

sector.

I Production of a dollars worth of manufacturing requires an

input of $0.1 from the agriculture sector, $0.1 from the energy

sector, and $0.3 from the manufacturing sector.

Find the output from each sector that is needed to satisfy a final

demand of $20 billion for agriculture, $10 billion for energy, and

$30 billion for manufacturing.

Solution to Three-Industry Model, Part 1

0.2 0 0.1

Then the technology matrix M = 0.4 0.2 0.1

0 0.4 0.3

0.8 0 0.1

Therefore, I M = 0.4 0.8 0.1

0 0.4 0.7

1.3 0.1 0.2

Then by computation, (I M)1 = 0.7 1.4 0.3

0.4 0.8 1.6

Solution to Three-Industry Model, Part 2

We have

1.3 0.1 0.2 20 33

X = 0.7 1.4 0.3 10 = 37

0.4 0.8 1.6 30 64

Hence,

I the total output of A is $33 million,

I the total output of E is $37 million, and

I the total output of M is $64 million.

n-Industry Model

For n inter-dependent industries, technology matrix M is

n 1 matrices.

I The matrix equation for the model is

X = MX + D

MATH 1003 Calculus and Linear Algebra (Lecture 12)

Summary of Knowledge for Matrices

I Algebraic form v.s. Geometric form

I supply and demand curve

I Basic ideas about Matrices (L.6)

I To know a matrix

I Row operation

Ri Rj , kRi Ri , Ri + kRj Ri

Summary of Knowledge for Matrices

I Gauss-Jordan Elimination

I Solver to system of linear equations (method 1, L.7)

I Using row operation to get the reduced form (L.7)

I System with infinite number of solutions which belong to

several families (L.7)

I Application: variables and restrictions, positive numbers may

be required for real world problem (L.8)

I Matrix Operation (L.9)

Summary of Knowledge for Matrices

I Identity matrix I

IM = MI = M

I Given a square matrix M, its inverse matrix M 1 satisfies

MM 1 = M 1 M = I

invertible

I Matrix Equation

I Solver to system of linear equations (method 2), unknown

right hand side (L.11)

I Leontief input-output analysis (L.12)

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