Input-Output Analysis Definition

The assessment of change in overall

economic activity as the result of some
corresponding change in one or several
activities.
An economic analysis, in which the
interdependence of an economy's various
productive sectors is observed by viewing
the product of each industry both as a
commodity demanded for final consumption
and as a factor in the production of itself and
other goods (Encyclopedia Britanica)

Input-Output Analysis Definition

A methodology for investigating production
relations among primary factors, intersectoral
flows, final demands, and transfers.
Input-output analysis considers inter-industry
relations in an economy, depicting how the
output of one industry goes to another industry
where it serves as an input, and thereby makes
one industry dependent on another both as
customer of output and as supplier of inputs.
(Wikipedia)

Wassily Leontief
(1905 - 1999)

The Structure of the American Economy,

1919-1939 (1941)
Input-Output Economics (1966)

Nobel Prize (1973)

Wassily Leontief
Born in St. Petersburg, 1906
Got Ph.D. in Econ in Berlin
Moved to NYC in 1931
Joined Harvard econ faculty in 1932
Constructed first input-output tables of US
Questioned the H-O Theory after WWII
1973 Nobel Prize

Econ Base vs Input-Output Models

Input-Output expands heavily upon the

economic base model of the economy.

1)
2)
3)

4)

Economic Base Techniques

Basic and Non-basic sectors
Ripple (multiplier) effects
analyzed at the economy level
Analyzes changes and impacts
at a gross economy level
Very general, but

1)
2)
3)

4)

Input-Output Analysis
Many different
industries/sectors
Ripple (multiplier) effects
contained in the inter industry
transactions
Analyzes changes and impacts
at a sector by sector level,
tracing flows of money
between industries
Much more

Input-Output Model
An IO model is centered on the idea of interindustry transactions:
Industries use the products of other industries
to produce their own products.
For example - automobile producers use steel,
glass, rubber, and plastic products to produce
automobiles.
Outputs from one industry become inputs to
another.
When you buy a car, you affect the demand for
glass, plastic, steel, etc

Basic Input-Output Logic

Steel

Glass

Tires

Automobile Factory

Plastic

Other
Components

From the Tire

Producers
Perspective
Tire Factory

Individual
Consumers

School
Bus

FINAL
DEMAND
FOR TIRES

Trucking
Companies

Automobile
Factory

INTERMEDIATE
DEMAND
FOR
TIRES

Input-Output Analysis: The BIG Point

The implicit assumption in economic base techniques is
that each basic sector job has a multiplier (or ripple)
effect on the wider economy because of purchases of
non-basic goods and services to support the basic
production activity. (the Basic Sector drives the Nonbasic Sector)
However, we know that Non-basic sector businesses
purchase Non-basic goods and services and Basic sector
businesses purchase Basic sector goods and services.
There are inter-industry linkages not contained within
the Economic Base model. The economy is much more
complex than the economic base techniques allow or
attempt to model.

Input-Output Analysis: The BIG Point

The central advantage of Input-Output analysis is that it
tries to estimate these inter-industry transactions and
use those figures to estimate the economic impacts of
any changes to the economy.
Instead of assuming a change in a basic sector industry
having a generalized multiplier effect, the IO approach
estimates how many goods and services from other
sectors are needed (inputs) to produce each dollar of
output for the sector in question. Therefore it is possible
to do a much more precise calculation of the economic
impacts of a given change to the economy.

Simplified Circular Flow View of The Economy

Consumption Spending (Yi)
Goods & Services
Households

Businesses

Businesses

Labor

Wages & Salaries

Households buy
the output of
business: final
demand or Yi

Households sell
labor & other inputs
to business as
inputs to production

Businesses purchase from

other businesses to produce
their own goods / services.
This is intermediate demand
or xij (output of industry i
sold to industry j)

Importance of Input-Output Analysis

1) Changes in the final demand of one sector
affect the national output
2) As the output is changed, it affect the
employment Situation of the of that sector and
the economy as a whole.
3) It gives an idea of all the Resources
requirement for the current year.
4)It analyses the Balance of Payment Situation of
the country.
5) It addresses the Planning problems of the
economy.

The Structure of IO Analysis

The ultimate goal of the Input-Output Analysis technique is
to generate a Total Requirements Table that shows the
flows of inputs between industries in the production of
output for a given sector.
To arrive at this final result, IO Analysis requires two earlier
steps:
1) Transactions table: Contains basic data on the flows of
goods and services among suppliers and purchasers during
a study year.
2) Direct requirements table: Derived from the transactions
table, this shows the inputs required directly from different
suppliers by each intermediate purchaser for each unit of
output that purchaser produces.

Producing Sector>>>>
Using Sector
Sector 1
2
3
.
.
N
Land
Labour
Capital
NR

Sector 1 2 3 .N

Inter-Industry
Transaction
Quadrant
(II)

Final Use
Quadrant
(I)

Value added
Quadrant
(III)

Direct Factor Purchase

(IV)

Analysis of Input-Output Table.

Quadrant II
Row Designate Output
Column Designate Inputs
The Quadrant contain the square matrix
(NxN) sectors
Each sector is both a user of input and
producer of output.

Analysis of Input-Output Table.

Quadrant I
Shows that output of each sector is normally
demanded for final use by both private and
Government or it may be exported out of the
country.
The horizontal summation of output of a
sector sold as (1) intermediate goods sold to
other sector as inter-industry demand + (2)
output sold for final use in the quadrant (I) =
Total output of that sector.

Analysis of Input-Output Table.

Quadrant III
Each column shows the amount of inputs
used by each sector in the production of the
output of that sector.
INPUT = OUTPUT
Quadrant IV
Purchase of labour services by the Govt.
sector.

The Transaction Table and Direct Reqs Tables

The Transactions Table
(in thousands of units)
Intermediate Purchasers
--Agriculture --Manufacturing
Intermediate Suppliers
--Agriculture
--Manufacturing
Primary Suppliers
--Households
Total Purchases (inputs)

Final Purchasers
--Households

Total
Sales (outputs)

10
5

30
10

60
35

100
50

85

10

15

110

100

50

110

260

Direct Requirements Table

(in thousands of units)
Purchasers
--Agriculture --Manufacturing
Intermediate Suppliers
--Agriculture
--Manufacturing
Primary Suppliers
--Households
Total Purchases (inputs)

0.10
0.05

0.60
0.20

0.85

0.20

1.00

1.00

Every unit of output

requires inputs of a certain
amount from other areas
of the economy.

The First Round of Economic Impacts

Direct Requirements Table
(in thousands of units)
Intermediate Purchasers
--Agriculture
--Manu
Intermediate Suppliers
--Agriculture
0.10
0.60
--Manufacturing
0.05
0.20
Primary Suppliers
--Households
0.85
0.20
Total Purchases (inputs)

1.00

1.00

Total Requirements Calculation (First Round)

(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch.
To Agr
To Manu Total
By Agriculture
200
20
60
80
By Manufacturing
100
10
20
30
By Households
0
170
20
190
Total indirect rounds
By All Supliers

300

300

To
Rd. 2

The Second-Fourth Rounds of Econ. Impacts

Total Requirements Calculation (Second Round)
(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
By Agriculture
80
8.0
18.0
26.0
By Manufacturing
30
4.0
6.0
10.0
By Households
0
68.0
6.0
74.0
Total indirect rounds

110.0

Total Requirements Calculation (Third Round)

(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
By Agriculture
26
2.6
6.0
8.6
By Manufacturing
10
1.3
2.0
3.3
By Households
0
22.1
2.0
24.1
Total indirect rounds

36.0

Total Requirements Calculation (Fourth Round)

(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
By Agriculture
8.6
0.9
2.0
2.8
By Manufacturing
3.3
0.4
0.7
1.1
By Households
0
7.3
0.7
8.0
Total indirect rounds

11.9

and so on
until the mult.
effect ends

The Total Requirements Results

Total Direct and Indirect Requirements Calculation
(in thousands of units)
Sales to Final
Total
Total
Purchasers
Direct Sales Indirect Sales
Agriculture
200.0
80.0
38.7
Manufacturing
100.0
30.0
14.9
Households
-190.0
109.6
Total

300.0

300.0

163.1

Total
Sales
318.7
144.9
299.6
763.1

When:
1) there are Final Sales of Agriculture = 200 and Final Sales of
Manufacturing = 100
2) we see a Total Economic Impact = 763.1, with that impact broken
down as:
1) 300.0 in Initial Sales to Final Purchasers
2) 300.0 in Total Direct Sales
3) 163.1 in Total Indirect Sales
The 300 units in Final Sales generate an additional 463.1 units of
economic activity. This illustrates the multiplier effect captured by
IO models.

The Total Requirements Table

Total Requirements Table
Requires Total Sales by
Agriculture
Manufacturing
Households
Total

Every Unit in Final Demand of

Agriculture
Manufacturing
1.15
0.86
0.07
1.29
1.00
1.00
2.22

3.15

For Agriculture

1.00 Sales to Final Purchasers

1.00 Sales by Primary Suppliers
0.22 Interindustry transactions
Similar to our Base Multiplier in Econ Base Theory
A 1.0 unit increase in demand for agriculture leads to
a total of 2.22 of sales.
For Manufacturing

1.00 Sales to Final Purchasers

1.00 Sales by Primary Suppliers
1.15 Interindustry transactions
Similar to our Base Multiplier in Econ Base Theory
A 1.0 unit increase in demand for manufacturing leads to
a total of 3.15 of sales.

RIMS Multipliers
The Bureau of Economic Analysis (BEA) produces State Level Regional
Input-Output Multipliers by industrial sector which are often used as
the basis for constructing an IO model.
Originally developed in the 1970s, RIMS (Regional Industrial Multiplier
System) multipliers are used for impact analysis for a given economy.
RIMS II data were developed in the 1980s (latest version is 1998)
Users can purchase data from BEA for $275 per region. BEA provides
handbooks for the use of this data.
County or multi-county regional RIMS data come in two series
Series I: for 490 detailed industries
Series II: for 38 industry aggregations
Empirical analysis shows that RIMS II data is accurate within 5% of
locally developed industry multipliers.
Advantages of the RIMS Multipliers:
1) Cheap
2) Can be compared across regions
3) Detailed industries 4) Updated regularly to reflect new data