INSTITUTE OF ENGINEERING,

JIWAJI UNIVERSITY

PRODUCTIVITY:
INPUT AND OUTPUT ANALYSIS
UNIT-V BE 8sem
(EL-8103) Electronics

Submitted By
Swati Dixit
Electronics Dept.
Input-Output Analysis

What Is Input-Output Analysis?

Input-output analysis ("I-O") is a form of macroeconomic analysis

based on the interdependencies between economic sectors or
industries. This method is commonly used for estimating the
impacts of positive or negative economic shocks and analyzing
the ripple effects throughout an economy. This type of economic
analysis was originally developed by Wassily Leontief (1905–
1999), who later won the Nobel Memorial Prize in Economic
Sciences for his work in this area.

The foundation of I-O analysis involves input-output tables. Such

tables include a series of rows and columns of data that quantify
the supply chain for all sectors of an economy. Industries are
listed in the headers of each row and each column. The data in
each column corresponds to the level of inputs used in that
industry's production function.

For example, the column for auto manufacturing shows the

resources required for building automobiles (e.g., so much steel,
aluminum, plastic, electronics, and so on). I-O models typically
include separate tables showing the amount of labor required per
dollar unit of investment or production. While input-output analysis
is not commonly utilized by neoclassical economics or by policy
advisers in the West, it has been employed in Marxist economic
analysis of coordinated economies that rely on a central planner.
Three Types of Economic Impact

I-O models estimate three types of impact: direct, indirect, and

induced. These terms are another way of referring to initial,
secondary and tertiary impacts that ripple throughout the
economy when a change is made to a given input level. By using
I-O models, economists can estimate the change in output across
industries due to a change in inputs in one or more specific
industries.

• The direct impact of an economic shock is an initial change

in expenditures. For example, building a bridge would
require spending on cement, steel, construction equipment,
labor, and other inputs.

• The indirect, or secondary, impact would be due to the

suppliers of the inputs hiring workers to meet demand.

• The induced, or tertiary, impact would result from the

workers of suppliers purchasing more goods and services.
This analysis can also be run in reverse, seeing what effects
on inputs were likely the cause of observed changes in
outputs.

An Example
Here's an example of how I-O analysis works: A local government
wants to build a new bridge and needs to justify the cost of the
investment. To do so, it hires an economist to conduct an I-O
study. The economist talks to engineers and construction
companies to estimate how much the bridge will cost, the supplies
needed, and how many workers will be hired by the construction
company. The economist converts this information into dollar
figures and runs numbers through an I-O model, which produces
the three levels of impacts. The direct impact is simply the original
numbers put into the model, for example, the value of the raw
inputs (cement, steel, etc.). The indirect impact is the jobs created
by the supplying companies, so cement and steel companies. The
induced impact is the amount of money that the new workers
spend on goods and services.

Input-Output Analysis in
Economics

One of the most interesting developments in the field of modern

economics is the model of industrial interdependence known as
input-output tableau. It owes its origin to Prof. Wassily Leontief.
Input-output analysis is of special interest to the national-income
economist because it provides a very detailed breakdown of the
macro-aggregates and money flows. This model is widely used in
planning and forecasting.

Input-Output Flow Tables:

Leontief imagines an economy in which goods like iron, coal,

alcohol, etc. are produced in their respective industries by means
of a primary factor, viz., labour, and by means of other inputs
such as iron, coal, alcohol, etc. For the production of iron, coal is
required.
-Industry Example:

Let us imagine, following Leontief, a simple economy in which

there are two industries—agriculture and manufacturing. Each
directly requires the use of a primary factor called labour in its
production process, and each requires in its productive process
inputs which are output of the other industry.

Table 1 provides a simplified picture of such an economy.

Agriculture and manufacturing are the first two entries, and each
of their rows will show what happens to their total output. The
third row is given to the primary factor, labour, of which the
community has a total of 50 units (thousands of man-years) per
year. These 50 units of labour are allocated as inputs to the two
industries in the respective amounts 10 and 40.

The first row total shows that the agricultural output totals 250
units (million of tons) per year. Of this total, 50 units go directly to
final consumption, i.e., to households and government, as shown
in the third column of row 1. What happens to the remaining 200
units of agricultural output?

They are required as inputs to help make possible the

community’s production of manufactured and agricultural goods.
Thus 175 units of agricultural output is required as material inputs
in order to make possible manufacturing production: this is shown
in the second column of the first row.

The remainder of agricultural output, 25 units, is required in

agriculture itself, e.g., that used to feed cows that turn out wheat,
and is shown in column 1 of row h Similarly, row 2 shows the
allocation of the total output of manufacturing industries, 120 units
(thousand of dozens) per year, among final consumption and
intermediate inputs needed in two industries.
In row 2, columns 1, 2 and 3 show allocations of 40, 20 and 60
units of manufactured goods per year to agriculture manufacturing
and final consumption (households and governments). All the
items in Table 1 are flows, i.e., physical units to per year (and not
stocks like capital or intangibles).

The ‘total outputs’ column gives the overall input of labour and
output of each commodity. The first column describes the input or
cost structure of the agricultural industry : the 250-unit agricultural
output was produced with the use of 25 units of agricultural
goods, 40 units of manufacturing goods, and 10 units of labour.

Similarly, the second column details the observed input structure

of the manufacturing industry. The ‘final demand’ column shows
the commodity breakdown of what is available for consumption
and government expenditure. Labour is assumed not to be
directly consumed.

Suppose, however, that we had deliberately chosen the physical

units in which each commodity is measured so that at some given
base prices, one unit costs Re. 1. Then each entry in Table 1
becomes a rupee value and the columns can be measured
virtually (literally) as cost figures. If we add down the columns, the
sum gives the total cost of producing the industry’s output.

Since the output is also measured in terms of rupee values, total

output is the same as total revenue. Thus agricultural revenue (at
the base prices) is Rs 250 million, and cost of production is Rs 75
mn. In manufacturing, revenue is Rs 120 mn, and cost Rs 235
mn. Thus in agriculture there was a profit of Rs 175 million, and in
manufacturing there was a loss of Rs 115 mn.

These items in Table 1 show that the sales of the two industries to
themselves and to each other might be described as “non-
GNP” items. The ‘final demand’ column represents the output
side of GNP, and the labour row represents the factor-cost side.
The economy can be thought of as a machine that uses up labour
(and has 50 units of labour per year at its disposal) and produces
final consumption. With its 50 units of labour the economy is
capable of producing an annual flow of 50 units of agricultural
goods and 60 units of manufactures.

The Closed Model:

If the exogenous sector of the open input-output model is

absorbed into the system as just another industry, the model will
become a closed one. In such a model, final demand and primary
input do not appear; in their place will be the input requirements
and the output of the newly conceived industry. All goods will now
be intermediate in nature, because everything is produced only
for the sake of satisfying the input requirements of the (n + 1)
sectors in the model.

At first glance, the conversion of the open sector into an additional

industry would not seem to create any significant change in the
analysis. Actually, however, since the new industry is assumed to
have a fixed input requirement it must now bear a fixed proportion
to the labour service they supply. This constitutes a significant
change in the analytical framework of the model.
Mathematically, the disappearance of the final demands means
that we will now have a homogeneous equation system.

Assuming four industries only (including the new one,

designated by the 0 subscript), the ‘correct’ output levels will
be, by analogy of the above matrix, those which satisfy the
following equation systems:

Being homogeneous, this equation system can have a non-trivial

solution if and only if the 4 x 4 technology matrix (I – A) has a
vanishing determinant. The latter condition is indeed always
fulfilled : In a closed model, there is no more primary input; hence
the column sum in the input-coefficient matrix A must now be
exactly equal to (rather than less than) l; that is

a0j + a1j + a2j + a3j = 1

or a0j = 1 – a1j – a2j – a3j

But this implies that, in every column of the matrix (I-A) above, the
top element is always equal to the negative of the sum of the
other three elements. Consequently, the four rows are linearly
dependent, and we must find |I -A| = 0. This guarantees that the
system does possess non-trivial solutions; in fact, it has an infinite
number of them.

This means that in a closed model, with a homogeneous-linear

equation system, no unique ‘correct’ output mix exists. We can
determine the output levels x1……………….. x3 in proportion to
one another, but cannot fix their absolute levels unless additional
restrictions are imposed on the model.
Mathematical Interpretation:

The simple input-output model can well be presented in terms of a

few mathematical equations and symbols and on the basis of
certain technological assumptions.

If we call agriculture industry 1, manufacturing industry 2

and give labour the subscript 0, then the previous table can
be presented as:

since X1 and X2 are the total outputs. In addition, we can always

add across the rows, so we know that

Leontief assumes:

1. There exist constant returns to scale.

2. There exists fixed coefficients of production, i.e., he supposes

that it takes a certain minimal input of each commodity per unit of
output of each commodity. The word “minimal” is of some
importance- if it takes 2 tonnes of iron ore to produce 1 tonne of
iron, no doubt the same iron could be produced from even more
ore, but as long as iron has value, nobody will be silly enough to
use more than the absolutely required 2 tonnes.
This special Leontief production function can be written in the
usual form (1). Let a1j be the required minimal input of commodity
i per unit of output of commodity j (here i = 0, 1, or 2, and j = 1 or
2).

Then

The available output certainly cannot be less than the sum of its
alternative uses, but it could, physically, be greater.

We can account for the output X1 as follows; a11X1 will be used up

in industry 1 itself, and a12X2 in industry 2. What is left will be used
up for final consumption C1, viz.,

C1= X1-a11X1 – a12X2

Similarly for X2, i.e., C2 = X2 – a21Xx – a22X2. Labour is not
produced but is available in amounts up to X0; the use of labour is
a01X1 in industry 1 and a02X2 in industry 2.

Thus we get:

L1and L2 intersect at L. If L1 and L2 were parallel, i.e., if they had

equal slopes, there would be no such point as 1. Any gross-output
levels in this region will enable society to consume C1 and C2 of
the two commodities. In fact, if L2 had a bigger slope than L1 there
would also be no point L. What is the condition that L should exist
or that some bill of goods should be producible? It is that the
slope of L2 must be less than the slope of L1 i.e.,
As we earlier required that we should not take a direct input of
more than one ton of coal to make one tonne of coal, inequalities
(7) or (8) assure us that if we add up the direct and indirect inputs
of coal that go into a ton of output (coal to make coal) that this will
be less than one tonne.

Clearly if a tonne of coal “contains”, directly and indirectly, more

than a ton of coal, self-contained production is not viable. If a
technology is to be viable at all, each of the “own” input
coefficients, a11 and a22 must be less than unity. Otherwise, there
would be negative net outputs (1 – a11 and 1 – a22).
The inequality (7) together with earlier 1 – a11 > 0 and 1 – a22 > 0
comprise what are called the Hawkins-Simon conditions.
Multiply the first equation in (4) above by 1 – a22, the second by
a22 and add to get
Now A01 is the direct labour input not into a unit of C1 but into the
gross direct and indirect X1 and X2 needed to support a unit of C1.
In other words, A01 represents the total direct and indirect labour
embodied in a unit of final consumption of commodity and A 02 is
the same for a unit of final consumption of commodity 2. The
schedule in (9) simply says that only those bill of final demand are
producible and efficient which require X0 units of labour to support
them.
A consumption possibility schedule (9), drawn in Fig. 2, can be
thought of as a social transformation curve. If it is desired to
consume only C1an amount X0/A01 can be produced, given the
available resources and technology.

If it is desired to give up some C1in favour of C2, such

substitutions are possible along the transformation curve.
Because the frontier is a straight line, substitution of C2 for
C1 takes place at constant costs. The MRS is constant, viz.,

Giving up one unit of C1 sets free (directly and indirectly) A0i units
of labour. To get 1 more unit of C2 requires A02 units of labour. By
giving up 1 unit of C1 society can, therefore, procure for itself
A01/A02 units of C2. The straight line constant cost nature of the
transformation curve reflects not only the linearity of the
technology, but also the presence of only one primary factor and
the absence of joint production.

Prices in the Leontief Model:

The constant MRS was shown to be A01/ A02. This must determine
the relative price of the two commodities:

We have interpreted A0i as the total labour content of 1 unit of

final output of commodity 1. If we designate the wage rate by W,
this tells us that

since labour is the only cost-generating element in the system. A

real system like Leontief’s can only hope to determine relative
prices. The absolute level of prices remains completely
indeterminate.