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TOPIC: INPUTOUT ANALYSIS AND MULTIPLIERS
INPUT OUTPUT ANALYSIS
Input out put is a novel technique invented by professor WASSILY W.LEONTIEF in 1951. It is used to analyze inter-industry relation ship in order to understand the inter- dependencies and complexities of the economy and thus the conditions for maintaining equilibrium between supply and demand it is also known as “inter-industry analysis”.
Before analyzing input out put model let us understand the meaning of the terms “input” and “output”.
According to professor J.R.HICKS, an input is “some thing which is bought for the enterprise “while an out put is “some thing which is sold by it". An input is obtained by an output is produced.
The sum of money values of inputs is the total cost of a firm and the sum of the money values of the outputs its total revenue. The inputs of one industry are the outputs of another industry and vice versa, so that ultimately their mutual relationships lead to equilibrium between supply and demand in the economy as a whole. The supply side consists of large inter industry flows of intermediate products and the demand side of the final goods.
In essence, the input-output analysis implies, that in equilibrium the money value of aggregate output of the whole economy must equal to the sum of the money values of inter industry inputs.
It has three elements: first, the input-output analysis concentrates on an economy which is in equlibrium.It is not applicable to partial equilibrium analysis. Secondly it doest not concern itself with the demand analysis. It deals exclusively with technical problems of production. Lastly it is base on empirical investigation.
The analysis based on the following assumption: The whole economy is divided into two sectors-“interindustry sector” and “final demand sector”. The total out put of any inter-industry sector is generally capable of being used as inputs by other-inter-industry sectors, by itself and by final demand sectors. No two products are produced jointly. Each industry produces only one homogeneous product.
Prices, consumer demand and factor supplies are given.
There are no external economies and diseconomies of production.
The input-output analysis consists of two parts: the construction of the input output table and the use of input output model.
THE USE OF INPUT OUTPUT MODEL IN PLANNING
The input-output table relates to the economy as a whole in a particular year. It shows the values of the flows of the goods and services between different productive sectors especially inter-industry flows. For example, a three-sector economy is taken in which there are two inter-industry sectors, agriculture and industry, and one final demand sector. In this table, the total output of the industrial, agricultural and house hold sector is set in rows and has been divided into the agricultural, industrial and final demand sectors.
• The inputs of these sectors are put in columns.
Sectors Inputs to agricultural inputs to industry 50 100 150 300 150 250 100 500 Final demand 100 150 0 250 Total output Or Total revenue 300 500 250 1050
Agricultural Industry Value added Total input Or Total cost
The first row total shows that altogether the agricultural output is valued at 300crore per year.
Of this 100crores go directly to final consumption that is house hold and government ,as shown in the third column of the first row the remaining output from agriculture goes as inputs;50 to itself and 150 to industry. Similarly the second row shows the distribution of total out put of the industrial sector valued at 500 cores per year.
column 1,2,3 shows that 100 units of manufacture goods go as inputs to agriculture ,250 to industry itself and 150for final consumption to the house hold sector.
Let us take column describes the input or cost structure of agriculture industry.
Agricultural output valued at 300 cores is produced with the use of agricultural goods worth rs.50 manufactured goods worth rs.100 and labor or/and management services valued at rs.150. to put it differently it costs rs.300 crores to get revenue of rs.300 crores from agricultural sector.
Similarly the second column explains the input structure of the industrial sector (150+250+100=500).
Thus “a column gives one point on the production function of the corresponding industry”.
The final demand column shows what is available for consumption and government expenditure.
The third row corresponding to this column shows as zero. This means that the households sectors are simply a spending sector that does not sell anything to itself. In other words, labor is not directly consumed.
The concept of multipliers is used to study how many times income increases as investment is done. As investment is increased the national incomes increases proportionately much more.
How many times it increases depends on the marginal propensity to consume. The higher the marginal propensity to consume the greater will be the multiplier.
Since the national income increases many times more as a result of a given investment, Keynes multiplier theory attaches greater importance to increase in public investment and government expenditure for raising the level of employment and income.
The multiplier emphasis that public investment is highly useful may necessary for increasing income and employment in the country.
KEYNES INCOME MULTIPLIER OR INVESTMENT MULTIPLIER Keynes income multiplier tells that a given increase in investment ultimately creates a total income which is many times the initial increase resulting from that investment.
• That is why it is called income multiplier. • It indicates how many times the total incomes increases by a given initial investment. Formulae =∆y/∆1 • ∆y indicates increase in income; ∆1 indicates increase in investment. • For example suppose 10crore rupees are invested in public works and as a result there is an increase of rs.30 crore in income. In this case income has increased 3 times that is multiplier is 3
• EFFICIENCY OF PRODUCTION: If the production system of the country cannot cope with the increase demand for consumption goods and make them readily available, the incomes generated will not be spend as visualized. As a result the marginal propensity to consume may decline.
• REGULAR INVESTMENT: The value of the multiplier will also depend on regularly repeated investments. A steadily increasing investment is essential to maintain the tempo of economic activity. • MULTIPLIER PERIOD: Successive does of investment must be injected at suitable intervals If the multiplier effect is not to be lost. • FULL EMPLOYMENT CEILING:As soon as full employment of the idle resources is achieved, further beneficial effect of the will practically cease.
USES OF A MULTIPLIER
• It places an important role in not only the economic theory but also in shaping economic policy.
• It places a vital role in income building
• It tells us how small increase in investment results in large increase in income.
• It is of special importance in the study and control of business cycles
It also explains the expansion of public sector in modern times.