Input-Output Analysis
Prof.Wassily W Leontief introduced input-output analysis technique in 1951.
Input means that objects or a material, which is demanded by the entrepreneur or
producer for the purpose of production and output, is the result or outcome of the
productive effort. Thus input is that object which is purchased with a view to use it in an
enterprise where as the output is things made and sold by the entrepreneur. Thus the
input is the expenditure of the firm and out put is its income.
In short input-output analysis is a technique for analyzing inter industry relations
and interdependence in the entire economy because input on one industry is the output of
other. The major share of the economic activity is involved in the production of
intermediate goods or inputs, goods that are output for one industry but are again
employed as input for further production by another industry. In this way it is a cyclical
process following incessantly among many industries. In short it can be said that in an
input-output analysis, in a state of perfect equilibrium, the monetary value of the total
output of an economy must be equal to the monetary value of all the inputs and outputs pf
all the industry taken together.
Main Features of the Input-output Analysis
Main features of the input-output analysis are
1. The analysis applies to an economy that is in equilibrium and economy with
partial equilibrium falls outside its sphere.
2. This technique bears no relationship with demand analysis because its sole
function is to analyse and consider the technical problems of the production.
3. This analysis is based on empirical study.
4. Input output analysis has two parts first, constructing an input-output table and
second making systematic use of the input-output model.
Assumptions
The following assumptions are made by Prof. Leontief before the analysis
1. The economy is in perfect equilibrium
2. the total economy can be divided into two sectors-the inter industry sector and the
final demand sector, each sector can be further sub-divided.
3. Every industry produces only one commodity and no two products are produced
jointly.
4. The total output of any one industry is used as an input by some other industry or
by the final demand sector.
5. Production follows the law of constant returns to scale.
6. The level of the technological progress remains constant in the economic field,
because of which the input coefficients remain constant.
7. There are no external economies and diseconomies of production.
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Leontief’s Statistic Model
Leontief’s analysis is based on the assumptions outlined above. In this economy,
it is presumed that the output of one industry is an input for another. Consequently, there
are clear inter-industry relationships and interdependencies in the economy because of
these inter-relationships the total demand and supply of the economy are in equilibrium.
This can be explained with the following example
Suppose there is three-sector economy. Among these agriculture and industry
combine to form the inter industry sector while the house hold sector is the final demand
sector. The following table provides a simplified form of this economy.
Table 1:-Input-Output Table
(Rs in crores)
Sector Input to Input to Final Demand Total output or
Agriculture Industry Total Revenue
Agriculture 25 175 50 250
Industry 40 20 60 120
House hold 10 40 0 50
Total input or 75 235 110 420
Total cost
In the above table the total output of the three sector is shown in rows and their
inputs in columns. The total of the first raw is 250 crores out of which 50 units are used
for final consumption and the remaining output become the input of the other two sectors
(175 to industry and 25 to agriculture). Similar is the case of industry. A column wise
study will reveal the cost structure of these sectors. The first column is concerned with
the cost-structure or inputs of agriculture. Agricultural output worth Rs.250 crores is
made possible by the use of units worth Rs. 25, 40 and 10 crores respectively from each
of the three sectors. The zero finger in the third column indicates the fact that the
household sector is a simply spending sector that does not sell anything to itself.
In general the above table can be written as follows
Table-2:-Input-Output Table
Purchasing Sector
S1 S2 Final Demand Total output
Selling S1 x11 x12 D1 X1
Sector S2 x21 x22 D2 X2
S3 x31 x32 0 X3
where X1 = x11+ x12 + D1, X2 = x21+ x22 + D2, X3 = x31+ x32.
Technological Coefficient
xij
Technological Coefficient is defined as aij = , where xij is the that part of
Xj
output of ith industry which is consumed by jth industry and Xj is the total out pt of the jth
industry.
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The matrix A = [aij] of the technological coefficient is called technological
matrix. The technological matrix of the above example is given as follows
Table 3:-Technoloical Matrix
(Rs in crores)
Sector Input to Input to Final Demand Total output
Agriculture Industry (F) (G)
Agriculture 25 175 50 250
= 0.10 = 1.46
250 120
Industry 40 20 60 120
= 0.16 = 0.17
250 120
House hold 10 40 0 50
= 0.04 = 0.16
250 120
Final Demand
An industry sells input to other industries, consumers, governments etc of which
the sales to the consumers government etc. are not used further production. So they are
called final demand.
D1 X1
Let F = be the final demand, G = be the gross output and A = [aij] be the
Dn X n
technological matrix then the Leontief input-output statistical model is given by
G = (I-A)-1 F. So F = (I-A)G. Where I is the identity of matrix of order n.
Eg:-
0.1 0.3
If the technological matrix of two sectors is A = and if the final
0 0.2
demand of each sector are 350 find the gross out put of each sector.
1 0 0.1 0.3 0.9 0.3 1.11 0.41
(I-A) = - = , I-A = 0.72 and (I-A)-1 =
0 1 0 0.2 0 0.8 0 1.25
1.11 0.41 350 532
G = (I-A)-1 F = = So the Gross out put of the two sectors
0 1.25 350 437.5
are 532 and 437.5.
