Applied Linear Algebra

Input-Output Analysis
Overview

Students will learn about

 Examples of Input-Output Models
 Structure of an Input-Output Model
 Technological Matrix
 The Leontief Inverse
 The Open Leontief Model
 Economic Examples
 How to Solve The Input-Output Problems
Introductory Example

 Let’s start with a simple example of an organic farm which produces

two goods, corn and fertilizer:
 A ton of Corn is produced using .1 ton of corn (to plant) and .8 ton of
fertilizer;
 A ton of Fertilizer is produced using .5 ton of corn and 0 tones of
fertilizer.
 We can describe each of the two production processes by pairs of
numbers (a, b), where a represents the corn input and b represents
the fertilizer input. The corn production process is described by the
pair of numbers (0.1, 0.8).
 The fertilizer production process is described by the pair of numbers
(0.5, 0).
Introductory Example

 The most important question to ask of this model is: What can
produced for consumption?
 Corn is used both in the production of corn and in the
production of fertilizer.
 Fertilizer is used in the production of corn.
 Is there any way of running both processes so as to leave
some corn and some fertilizer for individual consumption?
 If so, what combinations of corn and fertilizer for consumption
are feasible?
Introductory Example

 Answers to these questions can be found by examining a particular

system of linear equations.
 Suppose the two production processes are run so as to produce xC
tons of corn and xF tons of fertilizer.
 The amount of corn actually used in the production of corn is 0.1xC –
the amount of corn needed per ton of corn output times the number of
tons to be produced.
 Similarly, the amount of corn used in the production of fertilizer is
0.5xF.
Introductory Example

 The amount of corn left over for consumption will be the total amount
produced minus the amount used for production of corn and fertilizer:

xC  0.1xC  0.5 x F , 0.9 xC  0.5 x F

 The amount of fertilizer needed in production is 0.8xC tons. Thus the
amount left over for consumption is

x F  0.8 xC
Introductory Example

 Suppose we want our farm to produce for consumption 4 tons

of corn and 2 tons of fertilizer.
 How much total production of corn and fertilizer will be
required? Put another way, how much corn and fertilizer will the
farm have to produce in order to have 4 tons of corn and 2 tons
of fertilizer left over for consumers?
 We can answer this question by solving the pair of linear
equations
0.9 xC  0.5 x F  4,

 0.8 xC  x F  2.
Introductory Example

 This system is easily solved. Solve the second equation for xF

in terms of xC:
x F  0.8 xC  2.
 Substitute this expression for xF into the first equation:
0.9 xC  0.5(0.8 xC  2)  4

and solve for xC: 0.5xC = 5, so xC = 10.

 Finally, substitute xC = 10 back into equation for xF to compute
xF = 0.8 · 10 + 2 = 10.
Input-Output Analysis - Introduction

An input-output model of an economy is designed to

answer the questions

“What should be the level of output for each

industry in an economy in order to meet a vector
of final demands for products and services?”
Input-Output Analysis - Introduction

Production to meet the final demand for an industry’s goods

requires three types of inputs:

 Intermediate products produced by the same industry.

 Intermediate products produced by other industries.
 A set of primary (non-produced) inputs used in the production
of both intermediate and final products (value added).
Input-Output Analysis - Introduction

Likewise the output of an industry is used in three ways:

 Some is used as inputs in other producing activities in the

same industry.
 Some output is used as inputs in other industries.
 The remainder is used to satisfy final demands.
Input-Output Analysis - Introduction

These relationships are the basis of the input-output model.

However, the model has two simplifying basic assumptions.

 Each industry produces only one homogeneous commodity.

 The combination of inputs (both primary and produced)
required for a unit of production from an industry is fixed. Thus
marginal cost equals average costs and we have constant
returns to scale.
Input-Output Analysis - Introduction

Suppose a national economy is divided into n sectors and x  R

n

be a Production Vector (this n sectors are Production Part of
Economy).
 Suppose another part of economy only consumes product and
let d be a Final Demand (this is the demand of nonproductive
part of economy).
 Of course producers themselves create additional Intermediate
Demand for goods they need for their own production.
Input-Output Analysis - Introduction

 So, the Leontief Model is

amount   final 
  int ermediate   
 produced      demand 
x  demand  d 
   
Input-Output Analysis - Introduction

 Example: Suppose the economy consists of three sectors with

unit consumption vectors c1 , c2 , c3 :

Unit consumption
From Manufact. Agricult. Services.
Manufact. 0.5 0.4 0.2
Agricult. 0.2 0.3 0.1
Services. 0.1 0.1 0.3
  
c1 c2 c3
Input-Output Analysis - Introduction

 If sectors decide to produce of x1 , x2 , x3output

x1c1
correspondently, then is intermediate demand for
manufacturing (similarly for other sectors).
 So total Intermediate Demand is
Dem  x1c1  x 2 c 2  x3 c3  Cx
 Production equation is
x  Cx  d  x  Cx  d , I  C x  d

 Let d  50 30 20 , then we have equation

Input-Output Analysis - Introduction

 Solution

 0.5 0.4 0.2  50 

 0.2 0.7 0.1 x  30  

 0.1 0.1 0.7   20 
 5 4 2 500   1 0 0 226.1  226.1
 2 7 1 300   0 1 0 118.5   118.5 

 1 1 7 200  0 0 1 77.8  77.8 
Structure of an Input-Output Model

Since an input-output model normally encompasses a large

number of industries, its framework is of necessity rather
involved.
To simplify the problem, the following assumptions are as a
rule adopted:
 (1) each industry produces only one homogeneous commodity

 (2) each industry uses a fixed input ratio (or factor combination)
for the production of its output; and

 (3) production in every industry is subject to constant returns to

scale, so that a k-fold change in every input will result in an
exactly k-fold change in the output.
Structure of an Input-Output Model
 From these assumptions we see that, in order to produce each
unit of the j-th commodity, the input need for the i-th commodity
must be a fixed amount, which we shall denote by a ij .

 Specifically, the production of each unit of the j-th commodity

will require a1 j (amount) of the first commodity, a 2 j of the
second commodity,..., and a nj of the n-th commodity.
Structure of an Input-Output Model

 For our purposes, we may assume prices to be given and,

thus, adopt "a dollar's worth" of each commodity as its unit.

 Then the statement a 32  0.35 will mean that 35 cents' worth of

the third commodity is required as an input for producing a
dollar's worth of the second commodity.

 The symbol a ij will be referred to as an input coefficient.

Structure of an Input-Output Model

 For an n-industry economy, the input coefficients can be

 
arranged into a matrix A  a ij
 Each column specifies the input requirements for the
production of one unit of the output of a particular industry.
 The second column, for example, states that to produce a unit
(a dollar's worth) of commodity II, the inputs needed are: a12
units of commodity I, a 22 units of commodity II, etc.
 If no industry uses its own product as an input, then the
elements in the principal diagonal of matrix A will all be zero.
Structure of an Input-Output Model

 Input-coefficient matrix


 a11 a12 a13  a1n 

a a 22 a 23  a 2 n 
 21
 a 31 a 32 a 33  an3 
 
    
a n1 an2 an3  a nn 
The Open Model
 If, besides the industries, the model also contains an "open"
sector (say, Households) which exogenously determines a final
demand for the product of each industry and which supplies a
primary input (say, labor service) not produced by the
industries themselves, the model is an open model.
 In view of the presence of the open sector, the sum of the
elements in each column of the input-coefficient matrix (or
input matrix , for short) must be less than 1.
 Symbolically, this fact may be stated thus
n

a
i 1
ij 1 ( j  1,2,  , n)
The Open Model
 If industry I is to produce an output just sufficient to meet the
input requirements of the industries as well as the final
demand of the open sector, its output level must satisfy the
following equation:
x1  a11 x1  a12 x 2    a1n x n  d 1
or
(1  a11 ) x1  a12 x 2    a1n x n  d 1

where d 1 denotes the final demand for its output and a1 j x j

represents the input demand from the j-ih industry
The Open Model

 For the entire see of n industries, the "correct" output levels

can therefore be summarized by the following system of linear
equations:
(1  a11 ) x1  a12 x 2    a1n x n  d 1
 a 21 x1  (1  a 22 ) x 2    a 2 n x n  d 2
..........................................................

 a n1 x1  a n 2 x 2    (1  a nn ) x n  d n
The Open Model

 In matrix notation, this may be written as

(1  a11 ) a12  a1n   x1   d1 

 a (1  a )   a   x  d 
 21 22 2n   2   2 
 
         
     
 an1 an 2  (1  ann )   xn   d n 
The Open Model
 This system can also be written as ( I  A) x  d , where x and d
are, respectively, the variable vector and the final-
demand (constant-term) vector.
 The matrix I-A is called the technology matrix, and we may
denote it by T. Thus the system can also be written as Tx=d.
 As long as T is nonsingular — and there is no a priori reason
why it should not be — we shall be able to find its inverse , and
obtain the unique solution of the system from the equation

x  T 1 d  ( I  A) 1 d
Example
 For purposes of illustration, suppose that there are only three
industries in the economy and that the input-coefficient matrix
is as follows:
 a11 a12 a13  0.2 0.3 0.2
a a 22 a 23   0.4 0.1 0.2
 21
a31 a 32 a 33   0.1 0.3 0.2

 Note that in each column sum is less than 1, as it should be.

 Further, if we denote by a oj the dollar amount of the primary
input used in producing a dollar's worth of the j-th commodity,
we can write: a 01  0.3, a 02  0.3 and a 03  0.4 .
Example

 With the matrix A above, the open input-output system can be

expressed as follows:

 0.8 0.3 0.2   x1   d1 

 0.4 0.9 0.2    x    d 
   2  2
 0.1 0.3 0.8   x3   d3 

 By keeping the vector d in parametric form, our solution will

appear as a " formula" into which we can feed various specific
vectors to obtain various corresponding specific solutions.
Example

 By inverting the technology matrix, the solution can be found,

approximately (because of rounding of decimal figures), to be:

 x1  0.66 0.30 0.24   d1 

 x   T 1d  1 0.34 0.62 0.24    d 
 2 0.384    2
 x3   0.21 0.27 0.60   d3 
Example

 If the specific final-demand vector (say, the final-output target

of a development program) happens to be
10
d   5  in billions of $,
 6 
 then the following specific solution values will emerge
1
x1  0.6610  0.305  0.246  9.54  24.84
0.384 0.384
7.94 7.05
x2   20.68 x3   18.36
0.384 0.384
Example

 An important question now arises.

 Would the amount required be consistent with what is available in
the economy? The required primary input may be calculated as:


 a x 0.3(24.84)  0.3(20.68)  0.4(18.36)  $21.00
j 1
0j j
Therefore, the specific final demand will be feasible if and only if
the available amount of the primary input is at least $21 billion.
 If the amount available falls short, then that particular production
target will, of course, have to be revised downward accordingly.
How to Solve The Input-Output Problems

 Question 1:
How much output is available for final demand given the total
output level?

 Answer.
In this case the vector x is assumed to be known and we
should calculate the unknown vector d. The matrix equation
x=Ax + d immediately gives d=x – Ax and the right-hand side
is easily evaluated to get d.
How to Solve The Input-Output Problems

Example. The output levels of machinery, electricity and oil of

a small country (Georgia) are 3000, 5000 and 2000
respectively.

 Each unit of machinery requires inputs of 0.3 units of electricity

and 0.3 units of oil
 Each unit of electricity requires inputs of 0.1 units of machinery
and 0.2 units of oil
 Each unit of oil requires inputs of 0.1 units of electricity and 0.2
units of machinery

Determine the machinery, electricity and oil available for export.

How to Solve The Input-Output Problems

Solution. Let us denote the total output for machinery,

electricity and oil by x1 , x2 , x3 respectively, so that

x1  3000, x2  5000, x3  2000

 The matrix of technical coefficients is

 0 0.1 0.2 
A   0.3 0 0.1
 0.3 0.2 0 
How to Solve The Input-Output Problems

 From the equation d=x – Ax we see that final demand vector is

 d1   3000   0 0.1 0.2   3000 
 d    5000   0.3 0 0.1   5000  
 2      
 d3   2000   0.3 0.2 0   2000 
3000   900   2100 
5000   1100    3900 
     
 2000  1900   100 

 Therefore, the country has 2100, 3900 and 100 units of

machinery, electricity and oil, respectively, available for export.
How to Solve The Input-Output Problems

 Question 2:
How much total demand is required to satisfy a given level of
final demand?

 Answer.
In this case the vector d is assumed to be known and we need
to calculate the unknown vector x. The matrix equation x=Ax +
d rearranges to give x – Ax=d or (I – A)x=d. This represents a
1
system of linear equations and x  ( I  A) d .
How to Solve The Input-Output Problems

Example. Given the matrix of technical coefficients

 0.3 0.1 0.1

A   0.2 0.2 0.2 
 0.4 0.2 0.3

for three industries, I1, I2 and I3.

 Determine the total outputs to satisfy final demands of 49, 106
and 17 respectively.
How to Solve The Input-Output Problems

Solution. To solve this problem we need to find the inverse of

I – A and then multiply by the final demand vector.
The matrix I – A is

1 0 0  0.3 0.1 0.1  0.7 0.1 0.1

0 1 0  0.2 0.2 0.2   0.2 0.8 0.2
     
0 0 1  0.4 0.2 0.3  0.4 0.2 0.7 
How to Solve The Input-Output Problems

 We can find the inverse by calculating its cofactors. So the

inverse is
0.52 0.09 0.10 
1 1  
( I  A)  0.22 0.45 0.16
0.306  
0.36 0.18 0.54 

 So
 x1  0.52 0.09 0.10   49  120 
 x   1 0.22 0.45 0.16   106    200
 2  0.306      
 x3  0.36 0.18 0.54   17  150 
How to Solve The Input-Output Problems

 Question 3:
What changes need to be made to total output when final
demand changes?

 Answer.
In this case we assume that the current total output vector x is
chosen to satisfy some existing final demand vector d, so that
1
x  ( I  A) d
How to Solve The Input-Output Problems

 Suppose that the final demand vector changes by an amount .d

In order to satisfy the new requirements, the total output vector
is then given by

x  x  ( I  A) 1 (d  d )  ( I  A)1 d  ( I  A)1 d

 So, because of x  ( I  A)1 d we have x  ( I  A) 1 d

How to Solve The Input-Output Problems

 Example. Consider the following inter-industrial flow table for two

industries, I1 and I2:
Output
I1 I2 Final Demand
Input I1 200 300 500
bbbbbbbb I2 100 100 300

 Assuming that the total output is just sufficient to meet the output
and final demand requirements, write down
 the total output vector
 the matrix of technical coefficients
 And calculate the new total output vector needed when the final
demand for I1 rises by 100 units.
How to Solve The Input-Output Problems

 Solution. To calculate the current total outputs for I1 and I2 all

we have to do is to add together the numbers along each row
of the table. So

x1  200  300  500  1000

x2  100  100  300  500

 The first column of the matrix of technical coefficients

represents the inputs needed to produce 1 unit of I1.
 The first column of the inter-industrial flow table represents the
inputs needed to produce current total output of I1 which
equals 1000. So the first coefficient is 200/1000=0.2.
How to Solve The Input-Output Problems

 Likewise for other coefficients we define that the matrix of

technical coefficients is
0.2 0.6 
A 
 0.1 0.2 
 If the demand for I1 rises by 100 units and the demand for I2
remains constant, the vector giving the change in final demand
is
100 
d   
 0 
How to Solve The Input-Output Problems

 Because of
1 0 0.2 0.6   0.8 0.6 
I A     
 0 1   0.1 0.2   0.1 0.8 
and the inverse is 1 0.8 0.6 
( I  A) 1 
0.58  0.1 0.8

1 0.8 0.6  100  138

we define that x        
0.58  0.1 0.8  0   17 
to the nearest unit.
 Note that there is an increase in total output of I2 despite the
fact that the final demand for I2 remains unchanged.