cHaPTeR 9 INPUT-OUTPUT ANALYSIS IN ECONOMICS 1 INTRODUCTION In this chapter we study another important discipline in the mathematical n which the theory of nonnegative matrices finds elegant applica- is In particular, we will see that the primary mathematical tools in the study of linear economic models involve nonnegativity and, especially, the ry of M-matrices developed in Chapter 6. In the present chapter we iow how many of the results on M-matrices given earlier can be used to greatly simplify the construction and the analysis of Leontiet’s input-output ‘models in economics. It has been said by Miernyk [1965] that: “When Wassily Leontief pub- lished his Quantitative input-output relations in the economic system of the United States’ in The Review of Economics and Statistics [1936], he launched a quiet revolution in economic analysis that has steadily gained momentum.” It was only a matter of timing that the article, which represents a turning point in the development of economic thought, did not at first attract wide acclaim, The nations of the noncommunist world were in the midst of the Great Depression. Moreover, John Maynard Keynes had just published his General Theory of Employment, Interest, and Money [1936], a treatise that immediately attracted worldwide attention since it was focused on the problems of chronic unemployment in the capitalist economics of that day. It tums out that, unlike Keynes, Leontief was not concerned with the causes of disequilibrium in a particular type of economic system during a particular phase of its development; he was primarily interested in the structure of economic systems. In particular, he was interested in the way the component parts of an economy fit together and influence one another. He developed an analytical model that can be applied to any kind of economic system during any phase ofits development. As he noted himself, input-output is above lla ‘mathematical tool. Itcan be used in the analysis of a wide variety of economic 243244 8. Input-Output Analysis in Economies Broblems and as a guide forthe implementation of various kinds of economic policies, Leontiet’s input-output analysis deals with this particular question: What Lebel of output should each of n industries in a particular economic situation produce, in order that i will just be suficien to satisfy the total demand of the mnomy: for that product? With this in mind we now give an overview of mtief's models. These concepts will be made more precise in later sections of this chapter. In Leontief's approach, production activities of an economy are dis- aggregated into n sectors of industries, though not necessarily to individual firms in a microscopic sense, and the transaction of goods among the sectors is analyzed, His basic assumptions are as follows: (1) Each of the m sectors produces a single kind of commodity. Broadly interpreted, this means that the n sectors and n kinds of commodities are in ‘one-to-one correspondence. The sector producing the ith good is denoted by i (2) Ineach sector, production means the transformation of several kinds of goods in some quantities into a single kind of good in some amount. Moreover this pattern of input-output transformation is assumed to be stable, Intuitively, in a Leontief system this pattern assumes the following form. To produce one unit of the jth good, ty units of the ith good are needed as inputs for i= 1,....n in sector j, and 2 units of output of the jth good require 21, units of the ith good. The magnitudes 1, are called input coe} cients and are usually assumed to be constant. In the economist's terminology, the ratios of inputs are constant, and constant returns to scale prevail Let x; denote the ourput of the ith good per fixed unit of time. Part of this gross output is consumed as the input needed for production activities of the nsectors. Thus X xy A units of the ith good is consumed in production activities, leaving units of the ith good as the net output. This net output d, is normally called jemand of the ith good. Alternatively, d, can be thought of as the contribution of the open sector of the economy, in which labor costs, con- sumer purchases leading to profits, etc. are taken into account.1 Introduetion os Thus letting x and d denote the n-vectors with components x, and d, respectively, we obtain the system of linear equations ie ay U-Tx=4 24 The coefficient matrix a2) Aw l-T A of this system of linear equations is obviously in Z**". It will be seen later that the economic situation is “feasible” if and only if 4 is a nonsingular M- matrix; in which case the system can be solved for the gross output vector x= A”'d, which is necessarily nonnegative. Thus the system (1.1) has the characteristic feature that for the obvious économic reason, the relevant constants fy and d,, as well a the solutions x,, should satisfy the nonnegativity constraint. From the economic point of view, the solvability of (I.1) in the “nonnegative unknowns x, 20 means the feasibility of the Leontief model, as previously mentioned, ‘The model just described is called the open Leontief model, since the open sector lies outside the system. If this open sector is absorbed into the system as just another industry, the model is called a closed Leontief model. In this situation, final demand does not appear; inits place will be the input require- ‘ments and the output of the newly conceived industry. All goods will now be intermediate in nature, for everything that is produced is produced only for the sake of satistying the input requirements of the industries or sectors of the ‘model. Mathematically, the disappearance of the final demands means that We now havea homogeneous system of linear equations, where the coefficient ‘matrix is again in Z***. The problem here is to determine when this matrix isa (singular) M-matrix and when the system has nonnegative solutions. This will be discussed later in this chapter. z Thus far we have considered only the static Leontief models; that is, ‘models in which the input coefficients and the demands from the open sector «77: are held constant. However, a dynamic version of, say, the open Leontief ‘model can be constructed as follows. Let xf denote the output of the ith good at time k, let fy denote the amount of output of industry i per unit of input of industry jat the next time stage, and let a, 0 <1 < 1, be the propor- tion of output, which is the same for each industry, that is available for internal use in the economy. Then if the final demands d, are held constant, we have the difference equation tl sax +d, which can then be studied in terms of the framework of Chapter 7 on iterative methods. However, we shall be concerned only with the static models in the present chapter. 7