LINEAR ALGEBRA

IN
ECONOMICS
Leontief Input-Output Models
Leontief Input-Output Models

BACKGROUND
Professor Wassily Leontief, a Nobel Prize winner,*
deals with this particular question: "What level of
output should each of the n industries in an economy
produce, in order that it will just be sufficient to satisfy
the total demand for that product?"
The rationale for the term input-output analysis: The
output of any industry (say, the steel industry) is
needed as an input in many other industries, or even for
that industry itself; therefore the "correct" (i.e.,
shortage-free as well as surplus-free) level of steel
output will depend on the input requirements of all the
n industries.
In turn, the output of many other industries will enter
into the steel industry as inputs, and consequently the
"correct' levels of the other products will in turn depend
partly upon the input requirements of the steel
industry.
Nevertheless, the problem posed in input-output
analysis also boils down to one of solving a system of
simultaneous equations, and matrix algebra can
again be of service.
Input-Output Models
PHILIPPINE ECONOMY
Sectors:

SERVICES (banking, retail outlet etc.)

MANUFACTURING (cars, planes etc.)
ENERGY (oil, gas)
AGRICULTURE
Example :
3 goods ( steel, labor and food)
1 NEW UNIT OF STEEL REQUIRES
0.4 units of existing steels
0.5 of labor
1 NEW UNIT OF FOOD REQUIRES
0.1 of food
0.7 of labor
1 NEW UNIT OF LABOR REQUIRES
0.8 units of food
0.1 units of labor
0.1 units of steel
INPUT-OUTPUT Matrix:
STEEL FOOD LABOR
STEEL 0.4 0 0.1
A = FOOD 0 0.1 0.8
LABOR 0.5 0.7 0.1

STEEL
X= FOOD PRODUCTION MATRIX
LABOR
EXAMPLE
How much steel, food and labor should we produce to
satisfy a demand for 200 units of steel, 100 units of
food and 100 units of labor?
Solve:
A supplier supplies a coffee beans to a coffee shop A, B
and C in bags of 5kg, 10kg and 15kg as shown in the table
5kg 10kg 15kg
Shop A 50 100 30
Shop B 60 150 40
Shop C 80 200 70
The cost price of 5kg, 10kg and 15 kg bags are 10.60, 17.20
and 22.50 respectively.
a) Write down two matrices P and Q, such that the
elements of the matrix product PQ give the total cost
price of the beans delivered to each shop. Find the
product of PQ,
b) In June, shop A, B and c received 15, 10 and 5 such
deliveries respectively. Find the total number of 5 kg,
10kg and 15kg bags delivered in June.