An application of Matrix Algebra :

The Leontief Open Input – Output Model

Introduce : Wassily W. Leontief (1906 – 1999) won the 1973 Nobel Prize in economic science
for the development of the “input–output" method and its applications to economic problems.
The phrase "input–output" is used because the matrices show the values of outputs of each
industry that are sold as inputs to each industry and for final use by consumers.

The Leontief Open Input–Output Model is a model for the economics of a whole country or
region. In the model, there are n industries producing n different products such that the
input equals the output or, in other words, consumption equals production.

Let the n industries denoted by S1 , S2 , … , Sn .

 aij denotes the number of units produced by industry Si necessary to produce one
unit by industry Sj where 0  a1 j  a2 j  ...  anj  1 ( j  1, n ).
 d j is the number of external demand units of industry Sj .

Condition (*) : The total consumption equals the total production for the product of each
industry Si i.e for each industry Si we have
production = internal demand + external demand

In general, let x1 , x 2 , … , x n be the total output of industry S1 , S2 , … , Sn , respectively. Since

(*), then
 x1  a11 x1  a12 x2  ...  a1n xn  d1

 x2  a21x1  a22 x2  ...  a2 n xn  d2
 (**)
....................................................
 xn  an1 x1  an 2 x2  ...  ann xn  dn

where aij x j is the number of units produced by industry Si and consumed by industry Sj .
Let
 a11 a12
... a1n   x1   d1 
     
a a22
... a2 n  x2  d
A   21 ; X  ; D 2
 . . . .   ...   ... 
     
 an 1 an 2
... ann   xn   dn 
 A is called the Leontief matrix where each column of the matrix A satisfy
0  a1 j  a2 j  ...  anj  1 ( j  1, n )
 X is called the production level matrix.
 D is called the external demand matrix.
 A.X is called the internal demand matrix.
Then the system of linear equations (**)  X  A.X  D  ( I  A). X  D
A , B are given and the problem is to determine X from the foregoing matrix equation. Since
0  a1 j  a2 j  ...  anj  1 ( j  1, n ) then the matrix I  A is invertible.

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Pay attention :
 The production equation ( I  A).X  D is called the Leontief equation. The unique
solution of this equation is X  ( I  A) 1 D .
 We can use Cramer's Rule in the Leontief equation.

Exercise : An economy has the three industries S1 , S2 and S3 . The Leontief matrix is given by
 0, 2 0,2 0, 3 
 
A   0,3 0,1 0,2 
 0,1 0,4 0, 3 
 
Find the total output of industry S1 , S2 , S3 know that 58 , 58 , 62 are the number of externally
demanded units of industry S1 , S2 , S3 , respectively.
Solution :
Let x1 , x2 , x3 be the total output of industry S1 , S2 , S3 , respectively.
 0,8 0,2 0, 3  x1   58 
    
Consider ( I  A).X  D   0, 3 0,9 0,2  x2    58 
 0,1 0,4 0,7  x   62 
  3   
We use Cramer's Rule to find the unique solution to the foregoing matrix equation.
0,8 0, 2 0, 3
We have   0,3 0,9 0,2  0,331  0
0,1 0, 4 0,7
58 0,2 0,3 0,8 58 0,3
And D1  58 0,9 0, 2  66, 2 D2  0, 3 58 0, 2  59, 58
62 0,4 0,7 0,1 62 0,7
0,8 0, 2 58
D3  0,3 0,9 58  72,82
0,1 0, 4 62
Thus, the total output of industry S1 , S2 , S3 are
 D1
 x1  
 200  0
 D
 x2  2   180  0

 x  D3  220  0
 3 

Problem 1 : An economy has the three industries S1 , S2 and S3 . The Leontief matrix is given
by
 0,3 0,1 0,2 
 
A   0,3 0,2 0,2   ( aij )33
 0, 2 0,4 0, 3 
 
a. What is the meaning of the number 0, 4 in the matrix A ?
b. Assume that the total output of industry S2 is 200 . What is the number of units
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 produced by industry S3 and consumed by industry S2 ?
 120 
 
c. If the production level matrix is X   110  , find the internal demand matrix.
 100 
 
d. Find the total output of industry S1 , S2 , S3 know that 60 , 76 , 60 are the number of
external demand units of industry S1 , S2 , S3 , respectively.
Answer :
a. 0, 4  a32 : the number of units produced by industry S3 necessary to produce one unit
by industry S2
b. a32 x2  0, 4  200  80
 0,3 0,1 0,2   120   67 
    
c. A.X   0,3 0, 2 0,2  .  110    78 
 0, 2 0, 4 0, 3   100   98 
    
T T
d. We have ( I  A).X  D (*) where X   x1 x2 x3  and D   60 76 60  . Using
Cramer's Rule in the equation (*) … Solution : x1  200 , x2  240 , x3  280

Problem 2 : An economy has the three industries S1 , S2 and S3 . The Leontief matrix is given
by
 0, 4 0, 5 0, 3 
 
A   0, 2 0,1 0,1   ( aij )33
 0, 2 0,2 0,1 
 
a. Assume that the total output of industry S2 is 3000 . What is the number of units
produced by industry S2 and consumed by itself ?
b. Assume that the number of units produced by industry S1 and consumed by industry
S3 is 1200 . What is the total output of industry S3 ?
c. Know that the number of units produced by industry S1 and consumed by itself is 800 .
Find the number of units produced by industry S2 and consumed by industry S1 .
d. Find the total output of industry S1 , S2 , S3 know that 117 , 223 , 145 are the number of
external demand units of industry S1 , S2 , S3 , respectively.
Answer :
a. a22 x2  0,1  3000  300
1200 1200
b. Since 1200  a13 x3 then x3    4000
a13 0, 3
800 800
c. Since 800  a11x1 then x1    2000
a11 0, 4
Therefore a21 x1  0, 2  2000  400
T T
d. We have ( I  A).X  D (*) where X   x1 x2 x3  and D   117 223 145  . Using
Cramer's Rule in the equation (*) … Solution : x1  820 , x2  480 , x3  450

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