INPUT-OUTPUT ANALYSIS

Input-output analysis is a technique invented by Professor Wassily W. Leontief

in 1951. It is used to analyse inter-industry relationship in order to understand
the inter-dependencies and complexities of the economy and thus the conditions
for maintaining equilibrium between supply and demand.
As the inputs of one industry the outputs of another industry and vice versa. An
input is obtained but an output is produced. Thus input represents the expenditure of
the firm, and output its receipts. The sum of the money values of inputs is the total
cost of a firm and the sum of the money values of the output is its total revenue.
There are flows of goods in “whirlpools and cross currents” between different
industries. 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 the sum of the money values of inter-industry inputs and
the sum of the money values of inter-industry outputs. For example,Coal is an input
for steel industry and steel is an input for coal industry, though both are the outputs
of their respective industries. A major part of economic activity consists in
producing intermediate goods (inputs) for further use in producing final goods
(outputs). There are two types of relationships which indicate and determine the
manner in which an economy behaves and assumes a certain pattern of flows of
resources.The internal stability or balance of each sector of the economy, and the
external stability of each sector or intersectoral relationships. Professor Leontief
calls them the “fundamental relationships of balance and structure.” When expressed
mathematically they are known as the “balance equations’ and the “structural
equations”.
THE STATIC INPUT-OUTPUT
MODEL
The whole economy is divided into two sectors—“inter-industry sectors” and “final-
demand sectors,” both being capable of sub-sectoral division.The total output 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. Prices, consumer demands and factor
supplies are given. There are no external economies and diseconomies of production.
Assumptions:
(i) No two products are produced jointly. Each industry produces only one
homogeneous product.

(ii) Each producing sector satisfies the properties of linear

homogeneous production function i.e. Production of each sector is
subject to constant returns to scale.

(iii) The combinations of inputs are employed in rigidly fixed proportions. The
inputs remain in constant proportion to the level of output. It implies that there is no
substitution between different materials and no technological progress. There are
fixed input coefficients of production.

Example
• For understanding, a four-sector economy is taken in which there
are three industry sectors, X1, X2 , X3 and one final demand
sector.
• Horizontal explanation-Products of the these three industries are being used as
an intermediate product(input) and final consumption by government or
household sector.
• Vertical explanation-total inputs(from all sectors )utilised by each sector
for its production.
INPUT-OUTPUT MODEL
Input requirements of producing sectors
Total output of the X1 X2 X3 Final demand
sectors

X1 X11 X12 X13 F1

X2 X21 X22 X23 F2

X3 X31 X32 X33 F3

Primary input or labor L1 L2 L3

Rows which are consumption centres can be written as

• X = X +X +X +F
1 11 12 13 1

• X = X +X +X +F
2 21 22 23 2

• X = X +X +X +F
3 31 32 33 3
L=L1+L2+L3
SO,
= ΣX + ΣF
Xi ij i

Where all i and j varies from 1 to 3

.
Columns which are production functions can be written as:
• X = X +X +X +L
1 11 21 31 1
• X = X +X +X +L
2 12 22 32 2
• X = X +X +X +L
3 13 23 33 3
TECHNOLOGICAL COEFFICIENT
MATRIX
Input requirements of producing sectors

Total output of the X1 X2 X3 Final demand

sectors

X1 a11X1 a12X2 a13X3 F1

X2 a21X1 a22X2 a23X3 F2

X3 a31X1 a32X2 a33X3 F3

Primary input or L1 L2 L3
labor

th
From the assumption of fixed input requirements, the input used for the i
th
commodity for a fixed amount , in order to produce j commodity can be denoted
by aij

aij = Xij/Xj

• X1= a11X1+a12X2+a13X3+F1
• X2= a21X1+a22X2+a23X3+F1
• X3= a31X1+a32X1+a33X1+F1 L=l1X1+ l1X1+
l1X1
SO,
Xi= ΣaijXj+ Fj, for i=12and 3

And
, L= ΣliXi

X1 a11 a12 a13 X1 F1

X2 = a21 a22 a23 X2 + F2
X3 a31 a32 a33 X3 F3

X=AX+F
 and
L= Σ liXi
So
X=AX+F
X-AX=F
[I-A]X=F
X= [I-A]-1F

This way we can get the value of X1,X2 and X3

Let us take one example
Input-output table:
Purchasing sectors Total output or
total revenue

Sectors Inputs to Inputs to Final demand

agriculture industries
Agriculture 50 150 100 300

industries 100 250 150 500

Value 150 100 0 250

added(labo
ur)
Total input 300 500 250 1050

or total
cost

• The first row total shows that agricultural output is valued at Rs. 300 crores per
year.Of this total, Rs. 100 crores go directly to final consumption (demand),
that is, household 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 output of
the industrial sector valued at Rs. 500 crores per year. Columns 1, 2 and 3 show
that 100 units of manufactured goods go as inputs to agriculture, 250 to
industry itself and 150 for final con- sumption to the household sector.
• The first column describes the input or cost structure of the agricultural
industry. Agricultural output valued at Rs. 300 crores is produced with the
use of agricultural goods worth Rs. 50, manufactured goods worth Rs. 100
and labour services valued at Rs. 150. To put it differently, it costs Rs. 300
crores to get revenue of Rs. 300 crores from the agricultural sector. Similarly,
the second column explains the input structure of the industrial sector (i.e.,
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 has
been shown as zero. This means that the household sector is simply a spending
(consuming) sector that does not sell anything to itself. In other words, labour is
not directly consumed.
Technological coefficient matrix :

Purchasing sectors

Sectors Inputs to agriculture Inputs to industries

Agriculture 50/300=0.17 150/500=0.30

industries 100/300=0.33 250/500=0.50

CLOSED AND OPEN MODELS
In open model when value of final demand is given, we can find out absolute level of
production. But in a closed model , where value of final demand is not given absolute
values cannot be found.
The open input-output model contains the household sector as exogeneous sector which
associates with final demand. The exogenous sector supplies labour services besides the
producing sectors in system. The primary inputs are not produced by any industry, but
supplied by household sector to the producing sectors.
LIMITATIONS OF INPUT-OUTPUT
ANALYSIS
1. Errors in forecasting final demand will have grave consequence.
2. Current relative prices of inputs may not be same as the ones implied in table.
3. The assumption of linear homogeneous production function may not be valid. The

technological coefficients will not remain constant even if input price ratios are held
constant in such circumstance.
4. The constant coefficient formulation also ignores the possibility of industry outputs

reaching capacity, changing prices and input proportions in the table.

5. The assumption of constant technological coefficients goes counter to the possibility

of substitution of inputs and factors.

6. Input-output model building is highly costly in terms of time and money.
7. Sectoral division is, for practical purpose, limited. such a sectorisation is not goods

enough for many forecasting purposes.

SIGNIFICANCE OF INPUT-OUTPUT
MODEL

1.Input-output analysis is very important in the field of national income accounting

because it provides a more detailed breakdown of macro economic aggregates and money
flows in an economy.
2. It is useful for establishing inter-sectoral and inter-industry balances in an economy
which may be very useful in case of planed economy of a socialist type.

3. Input-output table can also be used as a basic for economy forcasting and future
planning. It can also help us in estimating the effects of a trade cycle, war or prolonged
strike etc.

4. This is used to forcaste input-output requirement and the balance of payments effects of
given days in final demand.

5. the knowledge of input-output relationship has been found useful in growth and
planning exercise of only those countries where manufacturing sector is considerably
developed, as a result, the inter-dependent between various productive activities due to
lack of considerable backward and forward linkages and thus, input-output technique
serves little purpose in economic planning.
 CONTENT

NO NAME OF TITTLE PAGE NO

1 INPUT-OUTPUT ANALYSIS

2 THE STASTIC INPUT-OUTPUT

MODEL

3 INPUT-OUTPUT TABLE

4 TECHNOLOGICAL COEFFICIENT
MATRIX

5 CLOSED AND OPEN MODEL

6 LIMITATION OF INPUT-OUTPUT
ANALYSIS

7 SIGNIFICANCE OF INPUT-OUTPU
MODEL
 REFERENCE
1. BORO LOKESH, MATHEMATICAL ECONOMICS

2. MEHTA-MADNANI, MATHEMATICS FOR ECONOMISTS

3. INTERNET
 ACKNOWLEDGEMENT

I WOULD LIKE TO EXPRESS MY SPECIAL THANKS OF

GRATITUDE TO MY ECONOMICS TEACHER ‘SANTANA
DUTTA’ MA’AM FOR THEIR ABLE GUIDENCE AND
SUPPORT IN COMPLETEING MY PREOJECT ‘INPUT-
OUTPUT ANALYSIS’. I CAME TO KNOW ABOUNT SO
MANY NEW THINGS I AM REALLY THANKFUL TO
THEM.

SECONDLY I WOULD ALSO LIKE TO THANK MY

PARENTS AND MY FRIENDS WHO HELPED ME A LOT IN
FINALIZING THIS PROJECT WITHIN THE LIMITED TIME
FRAME.

BANASHREE NEOG
2ND SEM,ECONOMICS
𝑋1
S