THE LEONTIEF INPUT-OUTPUT MØDEL

The Leontief input-output model in economics is named after Wassily Leontief who received
the Nobel Prize in Economics in 1973. This model gives a description of an
which it is assumed that whatever is produced is consumed, i.e. production economy in
consumption or, in other words, input equals output.
equals
There are two types of Leontief models, viz., closed and open.
Closed Model. In this model, the entire production is consumed by those participating in the
production, i.e., production is consumed internally. The objective in the ciosed model is to
find the relative income of each participant in the system.
Lopen Model. In this model, some of the production is consumed by those who produce it
and the rest of the production is consumed by external bodies such as households,
government and so on. The objective in the open model is to find the amount of production
needed to meet a forecasted demand, when the amount of production needed to meet the
current demand is known.
Note. The discussion of closed model is beyond the scope of this
book.
The Open Model
The general open Leontief input-output model can be described as follows
Suppose there are n industries in the economy. Each industry produces some goods or
services, which are partially consumed internally by the n industries. while the rest are Seu
 Applications of Matrices to Business and Economnics 211

consumners such as households, government and so on for final use called the final
demand

following table, called input-output table, describes the interdependence of industries

period:
during some time
INPUT-OUTPUT TABLE

Consumers (input)
Industry Industry Industry Final Total

Producers (outpur) 2 Demand output

Industry 1 C,

Industry 2

Industry n 'nn C,

All entries in the table are in appropriate units, say, in millions of rupees of output. Each
industry appears in a row and column The rows show the sales, called outputs, that each
industry makes to the others. The columns show the purchases, called inputs, that cach
industry makes from the others. There are two additional columns. The first represents the
final demand, showing the consumption by oher agencies such as government or in exports.
The last column represents the total output.
Reading across Row 1, we see that of the total output of x, units worth of product of
Industry 1, xX, is used as input by industry 1 itself (for iternal use), x, by Industry 2, and
soon and the remaining c, used directly by the consumer for final use. The other rows
interpreted in the same way.
Keading down Column 1, we see that in producing x, units' worth of product, Industry 1
Tequres xu units' worth from itself, x,, units' worth from Industry 2, and so on. The other
columns are interpreted in the same way.
ipu-Output analysis allows us to estimate the total production of each industry if there is a
iange in final demand as long as the basic structure of the economy remains the same. That
eamount of input required from each industry to produce one unit worth of output of
agivenindustry must remain fixed.
SuppOse that the value of final demand changes from c, to d, for Industry I, C, to 2
for Industry 2, and so on. To effect this change, we would like to estimate how much should
each industry now
producewe? need to determine how much of outputs of each industry is
To obtain the solution,
required to produce 1 unit worth of output of a given industry. For example, to obtain x
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units worth of output, Industry l requires x, units' worth fronm Busine

itself, units
x,
s Mathemates
Industry 2, and so on. Forming the ratios, we find that to produce 1
unit Worth North fron
of
Industry 1 requires of Industry 1, *21 of Industry 2., and so on.
gutput,
way, we can give the input requirements per unit worth of output for each Continuing in this

Setting
industry.

we can construct the matrix : A =

Lnl ann
The matrix A is called the input-output coefficient matrix or the technology moti.
entries inthe matrix Aare calledthe input-output coefficients or technological
Observe that the technological coeficient aj represents the amount of input required from coefficients,
industry to produce 1 unit's worth of output of jh industry. If

Y2
X =

is the output matrix representing the production of each industry in the system to meet the final
demand

dy
D=

1,
then the condition that production equals
Internal consumption + Consumer consumption requires that
This leads to the system of equations, called demand Total output
=
balancing equations :
Anplications of Matrices to Business and Economics 213

au Y) t a2 V2+.. + an Yn t d, = V1

+ an2 '2 t .. + an Y, t
d,= y,
ln terms of the matrix notation, this
requiremnent is equivalent to the equation
AX + D = X (1- A)X = D
Ifq-Ay' exists, then the output X is given byX= ([- A)'D.
The matrix I A is called the Leontief matrix.