Leontief Input/Output Model

• Industries interact with each other in industrial

production processes.
• Wassily Leontief economic planning for
variations in demand Model.

Gross Units consumed

Units consumed by Final
Output = by the industry + other industries +
Demand
Assumption of Input-output model
1. Each industry produces a single product and no
two industries produce the same product,
2. Total value of output is equal to the total value of
inputs and all the outputs are consumed by either
internal consumption or other producing industries or
final demand,
3. The input-output remains stable over the period
under consideration, that technological impact is
negligible.
 Example ONE
Consider two hypothetical industries M and N with interaction below. Units are in millions of
shillings and primary inputs constitute inputs such as labour, electricity and raw materials.
Industry M Industry N Final Demand Gross Output
Industry M 120 128 152 400

Industry N 200 96 24 320

Primary inputs 80 96

Assume that the total production by each industry is consumed and the demand after the
next five years is to double for each industry, we want to predict the gross output from each
industry in the fifth year.
 Solution to Example ONE
Let the gross output of M be x1 and that of N be x2 we can write the output
equation for M as,
Units consumed by M internally = x1 those consumed from N = x2 and final
demand is 152.
We can therefore say, for industry M,
x1 = x1 + x2 + 304
Similarly, for industry N,
x2 = x1 + x2 + 48
The two equations can be written in matrix form as,
= +
In general form, this equation can be expressed as,
X =AX + D
Where,
X = , A = and D =. Note that D = 2

The equation X =AX + D is the Input-Output equation with X as the Output vector, A as
the Input-output matrix and D as the Demand vector
 Solution to Example ONE Cont’d
The model is to enable planning for output that satisfies changes in final demand, hence
the need to establish the Output vector X. Consider the input-output equation,
X =AX + D
Subtract AX from both sides , we have,
X – AX = D
This can be written as
XI – A X = D => (I –A)X = D
Assuming that I- A is an invertible matrix, that is |I – A| 0, then (I –A) -1 exists, we can
write,
(I –A)-1(I –A) X = (I –A)-1 D
=> X = (I –A)-1 D
Using this solution in the example above we need to find the inverse of

I -A= - = - =

Consider = 0.7(0.7) – 0.5(0.4) = 0.49 – 0.2 = 0.29

The adjoint of (I –A) = is

 Solution to Example ONE Cont’d
Using this solution in the example above we need to find the inverse of
I -A= - = - =
Consider = 0.7(0.7) – 0.5(0.4) = 0.49 – 0.2 = 0.29

The adjoint of (I –A) = is X= Inverse(I –A)D

Therefore,
(I –A)-1 = =
If the demand in the fifth year doubled then the new demand vector D = 2 =
 Solution to Example ONE Cont’d

X= = = =

= => =

The output for M would be 800 and that for N 640 to satisfy the final demand after
five years.
 Example TWO
The interaction between three sectors in an economy are given in the
table below
A B C Final Demand Gross Output
A 60 16 80 44 200
B 60 48 20 32 160
C 40 32 60 68 200
Primary 40 64 40
Inputs

i) Determine the input-output matrix.

ii)Determine the required output levels if the final demand changes
to 50, 60 and 80 units for products A, B and C respectively.
iii)What will be the new primary inputs?
 Solution to Example TWO
Let the gross output of A be x1 hat of B be x2 and that of C be x3 we can write the output
equation for A as,
Units consumed by A internally = x1 those consumed from B = x2 and those from C = x3
final demand is 44.
We can therefore say, for industry A,
x1 = x1 + x2 + x3 +50
Similarly, for industry B,
x2 = x1 + x2 + x3 + 60
Similarly, for industry C,
x3 = x1 + x2 + x3 + 80
 Solution to Example TWO Cont’d
The three equations can be written in matrix form as,
= +
In general form, this equation can be expressed as,
X =AX + D
Where,
X = , A = and D =
 Solution to Example TWO Cont’d
i) The transition matrix A, is given as
A= =

ii) To determine the new production levels we solve for X on the input/ Output equation,
X =AX + D
Subtract AX from both sides , we have, X – AX = D
This can be written as XI – A X = D => (I –A)X = D
Assuming that I- A is an invertible matrix, that is |I – A| 0, then (I –A)-1 exists, we can
write,
(I –A)-1(I –A) X = (I –A)-1 D => X = (I –A)-1 D
 Solution to Example TWO Cont’d
We need to establish (I –A)-1 We know that (I –A)-1 =
I–A=-=
We know that Adj A = [Cofactor Matrix of (I-A)]T
Cof (I-A) =
= =
 Solution to Example TWO Cont’d
Adj(I- A )= [Cofactor Matrix of (I-A)]T => Adj(I – A) =
Adj (I-A) =
=
= 0.7 - (-0.1) +(-0.4)
=0.7(0.49 – 0.02) + 0.1(-0.21 – 0.02) - 0 4(0.06 + 0.14)
= 0.329- 0.023 -0.08 = 0.226
 Solution to Example TWO Cont’d
Since (I –A)-1 =
Then, (I –A)-1 =
=> X = (I –A)-1 D => = =
=
Therefore to satisfy the new demand the sectors A, B and C should effect
production levels of 246, 227, and 250 respectively.
 Solution to Example TWO Cont’d

iii) The new primary inputs:

The fractional variation of Primary inputs is based on the current inputs compared
to the current outputs. The fraction is then applied to the new output levels.

For sector A = x1 = x 246 = 18.2,

Similarly for the other two sectors we have,

B = x2 = x 227 = 91.8

C = x3 = x 250 = 50
 MARKOV CHAINS
• In life there are situations in which processes or events developing
over time depend on chance – they occur randomly.
• They are referred to as stochastic, for example,
• football team performance,
• weather patterns,
• student performance,
• political party performance,
• tosses of a coin
• There are special cases in which chance of being repeated depends
only on the immediate preceding outcome and not the earlier ones.
• Such cases are referred to as Markov Chains or Processes.
Definition of a Markov Chain
• A Markov chain is a process or sequence of trials in which each
trial has the same finite number of possible outcome and in
which the probability for each outcome for a given trial only
depends on the immediate preceding stage outcome and not on
any earlier ones.
• A Markov chain is such an evolving system wherein the state to
which it will go next depends only on its present state and does
not depend on the earlier history of the system
• The name honours Andrei Andreyevich Markov (1856–1922)
who was a Mathematics Professor in Russia.
If M has worn a game now, the probability of winning the next game is and that
the probability of football Team A winning the net game is . If football team A has
worn a game now and the probability of M winning the next game is and the
probability of football Team A winning again is . We can express this information
in Matrix form as follows:

Result of new match

M A
The matrix is called a transition matrix. Defines the probabilities of the next win
or loss State of the team.Result of the last match