Input–output model

In economics, an input–output model is a quantitative economic model that represents the

interdependencies between different sectors of a national economy or different regional economies.[1]
Wassily Leontief (1906–1999) is credited with developing this type of analysis and earned the Nobel
Prize in Economics for his development of this model.[1]

Origins
Francois Quesnay had developed a cruder version of this technique called Tableau économique, and Léon
Walras's work Elements of Pure Economics on general equilibrium theory also was a forerunner and
made a generalization of Leontief's seminal concept.[2]

Alexander Bogdanov has been credited with originating the concept in a report delivered to the All Russia
Conference on the Scientific Organisation of Labour and Production Processes, in January 1921.[3] This
approach was also developed by Lev Kritzman. Thomas Remington, has argued that their work provided
a link between Quesnay's tableau économique and the subsequent contributions by Vladimir Groman and
Vladimir Bazarov to Gosplan's method of material balance planning.[3]

Wassily Leontief's work in the input–output model was influenced by the works of the classical
economists Karl Marx and Jean Charles Léonard de Sismondi. Karl Marx's economics provided an early
outline involving a set of tables where the economy consisted of two interlinked departments.[4]

Leontief was the first to use a matrix representation of a national (or regional) economy.

Basic derivation
The model depicts inter-industry relationships within an economy, showing how output from one
industrial sector may become an input to another industrial sector. In the inter-industry matrix, column
entries typically represent inputs to an industrial sector, while row entries represent outputs from a given
sector. This format, therefore, shows how dependent each sector is on every other sector, both as a
customer of outputs from other sectors and as a supplier of inputs. Sectors may also depend internally on
a portion of their own production as delineated by the entries of the matrix diagonal.[5] Each column of
the input–output matrix shows the monetary value of inputs to each sector and each row represents the
value of each sector's outputs.

Say that we have an economy with sectors. Each sector produces units of a single homogeneous
good. Assume that the th sector, in order to produce 1 unit, must use units from sector .
Furthermore, assume that each sector sells some of its output to other sectors (intermediate output) and
some of its output to consumers (final output, or final demand). Call final demand in the th sector .
Then we might write
or total output equals intermediate output plus final output. If we let be the matrix of coefficients ,
be the vector of total output, and be the vector of final demand, then our expression for the economy
becomes

(1)

which after re-writing becomes . If the matrix is invertible then this is a linear
system of equations with a unique solution, and so given some final demand vector the required output
can be found. Furthermore, if the principal minors of the matrix are all positive (known as the
[6]
Hawkins–Simon condition), the required output vector is non-negative.

Example
Consider an economy with two goods, A and B. The matrix of coefficients and the final demand is given
by

Intuitively, this corresponds to finding the amount of output each sector should produce given that we
want 7 units of good A and 4 units of good B. Then solving the system of linear equations derived above
gives us

Further research
There is extensive literature on these models. The model has been extended to work with non-linear
relationships between sectors.[7] There is the Hawkins–Simon condition on producibility. There has been
research on disaggregation to clustered inter-industry flows, and on the study of constellations of
industries. A great deal of empirical work has been done to identify coefficients, and data has been
published for the national economy as well as for regions. The Leontief system can be extended to a
model of general equilibrium; it offers a method of decomposing work done at a macro level.

Regional multipliers
While national input–output tables are commonly created by countries' statistics agencies, officially
published regional input–output tables are rare. Therefore, economists often use location quotients to
create regional multipliers starting from national data.[8] This technique has been criticized because there
are several location quotient regionalization techniques, and none are universally superior across all use-
cases.[9]
Introducing transportation
Transportation is implicit in the notion of inter-industry flows. It is explicitly recognized when
transportation is identified as an industry – how much is purchased from transportation in order to
produce. But this is not very satisfactory because transportation requirements differ, depending on
industry locations and capacity constraints on regional production. Also, the receiver of goods generally
pays freight cost, and often transportation data are lost because transportation costs are treated as part of
the cost of the goods.

Walter Isard and his student, Leon Moses, were quick to see the spatial economy and transportation
implications of input–output, and began work in this area in the 1950s developing a concept of
interregional input–output. Take a one region versus the world case. We wish to know something about
inter-regional commodity flows, so introduce a column into the table headed "exports" and we introduce
an "import" row.

Table: Adding Export And Import Transactions

Economic Activities 1 2 ... ... Z Exports Domestic Final Demand Total Outputs
1
2
...
...
Z
Imports
A more satisfactory way to proceed would be to tie regions together at the industry level. That is, we
could identify both intra-region inter-industry transactions and inter-region inter-industry transactions.
The problem here is that the table grows quickly.

Input–output is conceptually simple. Its extension to a model of equilibrium in the national economy has
been done successfully using high-quality data. One who wishes to work with input–output systems must
deal with industry classification, data estimation, and inverting very large, often ill-conditioned matrices.
The quality of the data and matrices of the input-output model can be improved by modelling activities
with digital twins and solving the problem of optimizing management decisions.[10] Moreover, changes in
relative prices are not readily handled by this modelling approach alone. Input–output accounts are part
and parcel to a more flexible form of modelling, computable general equilibrium models[a].

Two additional difficulties are of interest in transportation work. There is the question of substituting one
input for another, and there is the question about the stability of coefficients as production increases or
decreases. These are intertwined questions. They have to do with the nature of regional production
functions.

Technology Assumptions
To construct input-output tables from supply and use tables, four principal assumptions can be applied.
The choice depends on whether product-by-product or industry-by-industry input-output tables are to be
established.[12][13]
Usefulness
Because the input–output model is fundamentally linear in nature, it lends itself to rapid computation as
well as flexibility in computing the effects of changes in demand. Input–output models for different
regions can also be linked together to investigate the effects of inter-regional trade, and additional
columns can be added to the table to perform environmentally extended input–output analysis (EEIOA).
For example, information on fossil fuel inputs to each sector can be used to investigate flows of embodied
carbon within and between different economies.

The structure of the input–output model has been incorporated into national accounting in many
developed countries, and as such can be used to calculate important measures such as national GDP.
Input–output economics has been used to study regional economies within a nation, and as a tool for
national and regional economic planning. A main use of input–output analysis is to measure the economic
impacts of events as well as public investments or programs as shown by IMPLAN and Regional Input–
Output Modeling System. It is also used to identify economically related industry clusters and also so-
called "key" or "target" industries (industries that are most likely to enhance the internal coherence of a
specified economy). By linking industrial output to satellite accounts articulating energy use, effluent
production, space needs, and so on, input–output analysts have extended the approaches application to a
wide variety of uses.

Input–output and socialist planning

The input–output model is one of the major conceptual models for a socialist planned economy. This
model involves the direct determination of physical quantities to be produced in each industry, which are
used to formulate a consistent economic plan of resource allocation. This method of planning is
contrasted with price-directed Lange-model socialism and Soviet-style material balance planning.[14]

In the economy of the Soviet Union, planning was conducted using the method of material balances up
until the country's dissolution. The method of material balances was first developed in the 1930s during
the Soviet Union's rapid industrialization drive. Input–output planning was never adopted because the
material balance system had become entrenched in the Soviet economy, and input–output planning was
shunned for ideological reasons. As a result, the benefits of consistent and detailed planning through
input–output analysis were never realized in the Soviet-type economies.[15]

Measuring input–output tables

The mathematics of input–output economics is straightforward, but the data requirements are enormous
because the expenditures and revenues of each branch of economic activity have to be represented. As a
result, not all countries collect the required data and data quality varies, even though a set of standards for
the data's collection has been set out by the United Nations through its System of National Accounts
(SNA):[16] the most recent standard is the 2008 SNA. Because the data collection and preparation process
for the input–output accounts is necessarily labor and computer intensive, input–output tables are often
published long after the year in which the data were collected—typically as much as 5–7 years after.
Moreover, the economic "snapshot" that the benchmark version of the tables provides of the economy's
cross-section is typically taken only once every few years, at best.
However, many developed countries estimate input–output accounts annually and with much greater
recency. This is because while most uses of the input–output analysis focus on the matrix set of inter-
industry exchanges, the actual focus of the analysis from the perspective of most national statistical
agencies is the benchmarking of gross domestic product. Input–output tables therefore are an instrumental
part of national accounts. As suggested above, the core input–output table reports only intermediate goods
and services that are exchanged among industries. But an array of row vectors, typically aligned at the
bottom of this matrix, record non-industrial inputs by industry like payments for labor; indirect business
taxes; dividends, interest, and rents; capital consumption allowances (depreciation); other property-type
income (like profits); and purchases from foreign suppliers (imports). At a national level, although
excluding the imports, when summed this is called "gross product originating" or "gross domestic product
by industry." Another array of column vectors is called "final demand" or "gross product consumed." This
displays columns of spending by households, governments, changes in industry stocks, and industries on
investment, as well as net exports. (See also Gross domestic product.) In any case, by employing the
results of an economic census which asks for the sales, payrolls, and material/equipment/service input of
each establishment, statistical agencies back into estimates of industry-level profits and investments using
the input–output matrix as a sort of double-accounting framework.

Dynamic Extensions

The Leontief IO model with capital formation endogenized

The IO model discussed above is static because it does not describe the evolution of the economy over
time: it does not include different time periods. Dynamic Leontief models are obtained by endogenizing
the formation of capital stock over time. Denote by the vector of capital formation, with its th
element, and by the amount of capital good (for example, a blade) used in sector ( for example,
wind power generation), for investment at time . We then have

We assume that it takes one year for investment in plant and equipment to become productive capacity.
Denoting by the stock of at the beginning of time , and by the rate of depreciation,
we then have:

(2)

Here, refers to the amount of capital stock that is used up in year . Denote by the
productive capacity in , and assume the following proportionalty between and :

(3)

The matrix is called the capital coefficient matrix. From (2) and (3), we obtain the following
expression for :
Assuming that the productive capacity is always fully utilized, we obtain the following expression for (1)
with endogenized capital formation:

where stands for the items of final demand other than .

Rearranged, we have

wehere .

If is non-singular, this model could be solved for for given and :

This is the Leontief dynamic forward-looking model[17]

A caveat to this model is that will, in general, be singular, and the above formulation cannot be
obtained. This is because some products, such as energy items, are not used as capital goods, and the
corresponding rows of the matrix will be zeros. This fact has prompted some researchers to consolidate
the sectors until the non-singularity of is achieved, at the cost of sector resolution.[18][19] Apart from
this feature, many studies have found that the outcomes obtained for this forward-looking model
invariably lead to unrealistic and widely fluctuating results that lack economic interpretation.[20][21][22]
This has resulted in a gradual decline in interest in the model after the 1970s, although there is a recent
increase in interest within the context of disaster analysis.[23]

Input–output analysis versus consistency analysis

Despite the clear ability of the input–output model to depict and analyze the dependence of one industry
or sector on another, Leontief and others never managed to introduce the full spectrum of dependency
relations in a market economy. In 2003, Mohammad Gani, a pupil of Leontief, introduced consistency
analysis in his book Foundations of Economic Science, which formally looks exactly like the input–
output table but explores the dependency relations in terms of payments and intermediation relations.
Consistency analysis explores the consistency of plans of buyers and sellers by decomposing the input–
output table into four matrices, each for a different kind of means of payment. It integrates micro and
macroeconomics into one model and deals with money in a value-free manner. It deals with the flow of
funds via the movement of goods.

Notes
a. However, CGE models rely on economic production functions, such as CES functions, and
are not suited to representing actual technologies in detail, whereas in IO there is no limit in
resolution. Furthermore, the use of CES functions results in using a number of separability
assumptions which can have strong implications on the assumed technology.[11]
See also
Anthropogenic metabolism Industrial metabolism
Computable general equilibrium Industrial organization
Economic base analysis IPO model
Economic planning Material balance planning
EIOLCA Material flow analysis
Environmentally extended input–output Net output
analysis Shift-share analysis
Fiscal multiplier Social metabolism
Gross output Socialist economics
Linear programming Urban metabolism

References
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s://www.jstor.org/stable/1914043). Econometrica. 41 (6): 1167–1182. doi:10.2307/1914043
(https://doi.org/10.2307%2F1914043). ISSN 0012-9682 (https://search.worldcat.org/issn/00
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8. A. T. Flegg , C. D. Webber & M. V. Elliott "On the Appropriate Use of Location Quotients in
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343409512331349173?journalCode=cres20), 16 July 2007. Retrieved 29 May 2019.
9. Lehtonen, Olli & Tykkyläinen, Markku. "Estimating Regional Input Coefficients and
Multipliers: Is the Choice of a Non-Survey Technique a Gamble?" (https://www.researchgat
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10. Masaev, S. N. (2021). "Leontev Input-Output Balance Model as a Dynamic System Control
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s://archive.org/details/comparativeecono0000louc_c2j3) (9th ed.). Harper & Row. pp. 178–
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Economics. Cambridge University Press, 2004.
 Isard, Walter et al. Methods of Regional Analysis: An Introduction to Regional Science. MIT
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Isard, Walter and Thomas W. Langford. Regional Input–Output Study: Recollections,
Reflections, and Diverse Notes on the Philadelphia Experience. The MIT Press. 1971.
Lahr, Michael L. and Erik Dietzenbacher, eds. Input–Output Analysis: Frontiers and
Extensions. Palgrave, 2001.
Leontief, Wassily W. Input–Output Economics. 2nd ed., New York: Oxford University Press,
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Miller, Ronald E. and Peter D. Blair. Input–Output Analysis: Foundations and Extensions.
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Miller, Ronald E. and Peter D. Blair. Input–Output Analysis: Foundations and Extensions,
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Analysis. N.Y.: Oxford UP, 1989.[HB142 F76 1989/ Suzz]
Miernyk, William H. The Elements of Input–Output Anaysis, 1965.Web Book-William H.
Miernyk (http://www.rri.wvu.edu/WebBook/Miernykweb/new/index.htm) Archived (https://we
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Polenske, Karen. Advances in Input–Output Analysis. 1976.
Pokrovskii, Vladimir N. Econodynamics. The Theory of Social Production (https://www.sprin
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US Department of Commerce, Bureau of Economic Analysis . Regional multipliers: A user
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Eurostat Eurostat manual of supply, use and input-output tables. Office for Official
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External links
International Input–Output Association (http://www.iioa.org)
Input–Output Accounts Data (https://www.bea.gov/industry/io_annual.htm), Bureau of
Economic Analysis
Input–Output Analysis and Related Methods (http://www2.sjsu.edu/faculty/watkins/inputoutp
ut.htm) Archived (https://web.archive.org/web/20210505101943/https://www.sjsu.edu/facult
y/watkins/inputoutput.htm) 5 May 2021 at the Wayback Machine, San José State University
Doing Business project input/output tables for reforms (http://www.doingbusiness.org/)
Energy Economics. Input–Output Analysis: Lecture – 6 (https://www.youtube.com/watch?v=
onIhwmbL8CA) and Lecture 7 (https://www.youtube.com/watch?v=CTt4y8bokWs) – two
introductory videos on Input–Output methodology with a focus on energy economics from
IIT Kharagpur.

Models
REMI (Regional Economic Models, Inc.) (http://www.remi.com/)
IMPLAN (Impact Analysis for Planning) (http://implan.com/)
REDYN (Regional Dynamics Model) (http://www.redyn.com/)
Retrieved from "https://en.wikipedia.org/w/index.php?title=Input–output_model&oldid=1278522878"