• To understand an Input Output analysis.

• To understand what an Input Output

framework is.
• To understand the purpose of an Input Output
framework.
• To understand how to construct an Input
Output framework.
• Input-output analysis is a form of
macroeconomic analysis based on the
interdependencies between different
economic sectors or industries.
• Input output analysis is commonly used for
estimating the impacts of positive or negative
economic shocks and analysing the ripple
effects throughout an economy.
• It is derived from supply and use tables. But in being
dependent on the making of further assumptions they also
represent a first step away from the description into the
modelling of an economy.
• Input output tables are employed for the simulation of
possible developments of an economy, not for measuring
them.
• They are a useful tool for planning, for politics, for any
activity that needs a more elaborate analysis then obtained
through mere accounting.
• Constructing an input output table implies that the tables of
supply and use are merged into one single table.
• Input Output Tables (IOTs) can be compiled basing on
product-by-product IOTs and industry-by-industry IOTs
• The input-output-framework may be seen as
an extension to the production account
• In addition to industries, which were discussed
in the National Accounts I, our focus will now
be on commodities being traded between these
industries in order to allow division of labour
within the national production process.
• Two tables, called ‘supply’ and ‘use’ form the
basis of an input-output-framework.
• It serves as a comprehensive tool for analysing
and forecasting the structure of an economy.
• Input-output framework is as well beneficial in
away that all information of the SUTs and IOTs
can be integrated into one matrix.
• From the above table, Column sums are nor
identical to row sums (refer to the three values
72, 119 and 58).
• The interpretation is as follows: The table
shows three abstract production processes,
each of which produces one product group
only (1+3 for branch 1, 2 for branch 2 and 4 for
branch 3). By means of this table it is possible
to simulate the effect of changes in final
demand on value added in different branches.
Input-output analysis is based on various assumptions about the economy and the inter-relationships between
industries. These assumptions include:
Input-Output Models are linear
 They assume that a given change in the demand for a commodity or for the outputs of a given industry
will translate into a proportional change in production.
Change is immediate
 Input-output models do not take into account the amount of time required for changes to happen.
Economic adjustments resulting from a change in demand are assumed to happen immediately.
No capacity constraints
 The assumption is that there are no capacity constraints and that an increase in the demand for labour
will result in an increase in employment (rather than simply re-deploying workers).
Spending of personal income
 It is assumed that consumers spend an average of 95% of their disposable income on goods and
services. The remaining 5% of disposable income goes into savings. This assumption can be changed if
there is evidence to suggest doing so in particular cases.
Stability of relationships between industries
 The current BC Input-Output Model is derived from a “snapshot” of B.C.’s economic structure in 2017.
It assumes that relationships between industries are relatively stable over time, so that the 2017 structure
of the economy can be used to estimate the economic impact associated with a particular project.
In the supply table, flows of goods and services are valued at basic
prices.

In the use table, the flows of goods and services are valued at
purchasers' prices.

In order to have a consistent valuation for the supply and use tables,
the transition of supply at basic prices to supply at purchasers' prices
is needed. As supply equals use for products, two identities now hold:
 supply at purchasers' prices is equal to use at purchasers' prices;
 supply at basic prices is equal to use at basic prices.

Gross value added is recorded at basic prices. It is output valued at

basic prices less intermediate consumption valued at purchaser's
prices.
Balancing of supply and use of a product is easier
when the number of products distinguished is
higher and the source data is available at this
level of detail. The quality of the balanced results
will be higher; this is in particular true when there
are data gaps.
The process of compiling a balanced commodity-flow
system can be summarised in the following way:
 The first step will be to gather all information on target
totals and the values that can be entered directly into
the system as predetermined.
 The next step will create an initial version of the
product balances. This version can be compiled using
automatic processes, but at this stage a number of
unsolved problems will remain: For some products
supply will not equal uses. For most categories of use
the totals will usually differ from their targets. Total
trade and transport margins and total VAT may also
differ from their respective targets. This step will be
referred to as “Automatic balancing”.
 Then follows a step in which the initial version of the product balances is
adjusted manually. The unsolved problems are examined closely. In many
cases such problems will reveal errors in the calculations that produce
data input to the product balances or in the primary statistics itself.
Solutions to such problems may be found in co-operation with the
relevant sections of the statistical office and may involve changes in
supply, predetermined uses, or target totals. A number of products are
redistributed between uses to bring the distance between totals and
targets within an acceptable range for each category of use. Corrections
to the initial balances are entered into the system to create a new - but not
yet final - version. This step will be referred to as “Manual balancing”.
 It should be noted that the following identities hold after balancing:
Total supply at purchasers’ prices equals total uses at purchasers’ prices of
the use table.
Total supply at basic prices equals total uses at basic prices of the use table
Just like Supply and Use tables, the Input-Output
table combine three different roles namely;
 description

 statistical tool

 tool for analysis.

 Input-output framework gives a systematic
description of the generation of income and
supply of product, and use by industry.
Developments of the inputs and outputs of
production processes of individual industries
are shown in the context of the national
economy, i.e. related to the production
processes of other domestic industries and the
rest of the world and final consumption
expenditure .
 Since an input-output framework comprises of supply and
use tables, one of the major roles is to show changes in the
structure of the economy, e.g. changes in the importance of
various industries, changes in the inputs used and outputs
produced and changes in the composition of final
consumption expenditure, gross capital formation, imports
and exports. Such changes may reflect developments such
as globalisation, outsourcing, innovation and changes in
labour costs, taxes, oil prices and exchange rates.
 From the input-output framework, supply and use tables in
prices of the previous year are used to compile GDP volume
growth statistics, for describing changes in economic
structure in nominal or volume terms. They also provide a
framework in which to present national price changes and
changes in labour costs.
The supply and use tables serve a variety of statistical purposes namely:
 Identifying gaps and inconsistencies in data sources;
 Making estimates by residual, for example estimating the final
consumption of specific products as a residual after other uses of the
products have been allocated;
 Making estimates by extrapolating figures from a base period to later
periods for which less reliable information is available. For example,
annual figures may be estimated on the basis of the detailed supply and
use figures for a benchmark year, and later quarterly figures can be
estimated by extrapolating from the reference period;
 Checking and improving the consistency, plausibility and completeness
of figures in the supply and use tables and derived figures such as those
in the production accounts. To this end, the balancing process is not
limited to supply and use tables at current prices
 Weighting and calculation of index numbers and price and volume
measures, e.g. of GDP by deflating final uses by product or of GDP by
applying the double-deflation method by industry.
 A major analytic strength of input-output
tables is that they enable the measurement of
not only first order effects when there are, for
example, changes in energy prices or labour
costs, but also second order and more indirect
effects. For example, a significant increase in
energy prices will affect not only those
industries that use energy intensively, but also
those industries that use the outputs of energy-
intensive producers. Such indirect effects can
be highly relevant, as they are sometimes more
significant than the direct effects.
Industry-by-industry tables are well suited for
analyses related to industries, e.g. tax reform,
impact analysis, fiscal policy and monetary
policy; they are also closer to the various
statistical data sources.
Product-by-product tables are well suited for
analyses related to homogeneous production
units, e.g. productivity, comparison of cost
structures, employment effects, energy policy and
environmental policy.
There are four basic choices open to the input-output
compiler namely:
a) A product by product approach using a product
technology assumption,
b) A product by product approach using an
industry technology assumption,
c) An industry by industry approach assuming a
fixed product sales structure,
d) An industry by industry approach assuming a
fixed industry sales structure.
 Options a and d may result in negative entries;
options b and c do not.
Both product by product and industry by industry
tables may be compiled. They serve different
analytical functions. For example, to ensure that price
indices are strictly consistent, a product by product
matrix is to be preferred. For a link to labour market
questions, an industry by industry table may be
more useful. Although traditionally a lot of interest
focused on the product by product tables, this was
accompanied in large part by an attention to the
underlying technology. Increasingly the economic
interaction of different industries has brought more
interest in the industry by industry tables.
 In practice, no single method is used on its own. Knowledge
of the type of product or industry in question should dictate
whether an industry-based conversion procedure or a
product-based one is most appropriate. Some secondary
products may be dealt with one way and others another
despite the fact that, on occasion, negative values may
initially appear.
 The extent of variation between the various approaches will
depend on a number of factors, including in particular the
extent of secondary production in the supply matrix. In
general, the greater the degree of disaggregation and thus
the less secondary production to be reallocated, the closer
the input-output tables will resemble the supply and use
tables. Indeed some countries prefer to work with very
detailed supply and use tables and not produce symmetric
tables at all.
The first row total shows that agricultural output is
valued at Rs. 300 crores per year. Of this total, Rs. 100
crores go directly to final consumption (demand), that
is, household and government, as shown in the third
column of the first row. The remaining output from
agriculture goes as inputs: 50 to itself and 150 to
industry. Similarly, the second row shows the
distribution of total output of the industrial sector
valued at Rs. 500 crores per year. Columns 1, 2 and 3
show that 100 units of manufactured goods go as
inputs to agriculture, 250 to industry itself and 150 for
final consumption to the household sector.
The first column describes the input or cost structure of the
agricultural industry. Agricultural
output valued at Rs. 300 crores is produced with the use of
agricultural goods worth Rs. 50, manufactured goods worth
Rs. 100 and labour services valued at Rs. 150. To put it
differently, it costs Rs. 300 crores to get revenue of Rs. 300
crores from the agricultural sector. Similarly, the second
column explains the input structure of the industrial sector
(i.e., 150 + 250 + 100 = 500).
Thus “a column gives one point on the production
function of the corresponding industry.” The
‘final demand’ column shows what is available for
consumption and government expenditure. The third
row corresponding to this column has been shown as
zero. This means that the household sector is simply a
spending (consuming) sector that does not sell
anything to itself. In other words, labour is not directly
consumed