Regional development theories Development planning

Input – output analysis

Presented by:Aalekhya Kandala08011BA001VI semB.Tech PlngJNA & FAU

Introduction

Input-output model is a novel technique invented by Professor

Wassily W.Leontief in 1951.

It is used to analyze inter-industry relationship in order to

understand the inter-dependencies and complexities of the economy

and thus the conditions for maintaining equilibrium between supply

and demand. It is also known as "inter-industry analysis."

"Input-output analysis is the name given to the attempt to take

account of general equilibrium phenomena in the empirical analysis

of production.“

- William J.Baumol

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Introduction

The basic features of input-output analysis are:

The input-output analysis is concerned with production only. It

attempts to determine what amounts of different inputs must be

used up in the production process for getting a certain output of a

commodity, given the supply of productive factors and the state of

technology.

Input-output analysis is an empirical investigation. It distinguishes

it from the approach of general equilibrium theorists. It is both

simplified and narrow than the usual general equilibrium theory.

It attempts to investigate how the various sectors, sub-sectors are

or industries constituting an economy interrelated.

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Main Features

The input-output analysis is the finest variant of general

equilibrium.

It has three main elements:

It concentrates on an economy which is in equilibrium. It is not

applicable to partial equilibrium analysis.

It does not concern itself with the demand analysis. It deals

exclusively with technical problems of production.

It is based on empirical investigation and assumptions.

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Assumptions

This analysis is based on the following assumptions:

The whole economy is divided into two sectors-"inter-industry

sector" and "final demand sector," both being capable of sub-

sectoral division.

The total output of any inter-industry sector is generally capable of

being used as inputs by other inter-industry sectors, by itself and

by final demand sectors.

No two products are produced jointly. Each industry produces only

one homogeneous product.

Prices, consumer demands and factor supplies are given.

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There are constant returns to scale.

There are no external economies and diseconomies of production.

The combinations of inputs are employed in rigidly fixed proportions.

The inputs remain in constant proportion to the level of output. It

implies that there is no substitution between different materials and

no technological progress. There are fixed input coefficients of

production.

The input-output analysis consists of two parts: the construction

of the input-output table and the use of input-output model.

Assumptions

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Construction of Input-Output Table

Structurally a typical input-output

table comprises of four quadrants

as shown in table.

Table is divided horizontally into a

processing and a payments sector.

Quadrants I and II reflect the

processing sector, quadrants III

and IV indicate the payments

sector.

Processing Sector

Payment Sector1/5/16

Construction of Input-Output Table

In the table while the two right hand quadrants

record the final demand, the two left-hand

quadrants reflect the demand of the intermediate

users.

Demand of Intermediate

UsersFinal Demand

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The Input-Output table quadrant wise

Quadrant I: The upper right hand quadrant depicts the supply of

output; of each industry to final consumers.

Quadrant II: The upper left hand quadrant records the inter-

industry supply of outputs and purchase of inputs. Along rows it

shows the sale of the product of each industry to all other

industries; and along columns purchases of each industry from

other industries forming its input

Quadrant III: The lower left-hand quadrant shows the payments

industries for the various factor services (primary inputs) and also

the payment to foreigners for the purchase of imports.

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Quadrant IV : The lower right hand quadrant indicates the direct sales

of factors of production to final users, viz., the households and the

government.

The final demand quadrant records the end use of the finished products

in the form of final consumption expenditure of households and

government, gross domestic investment and exports. To each of these

components of the final demand a separate column may be allocated in

the input-output table. 

Along rows it records factor payments and allocates a row to each of the

inputs and along columns it shows a payment made by each of the

industries to the various factors employed.

Imports can be recorded either in the row of the primary input section,

or along a column which records; them as a negative final demand.

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Input-Output Table

• X stands as the value of out put 1/5/16

The two subscripts denotes the industry where output has

originated and the latter the destination to which it has reached.

Example, xij refers to the element in the ith row and the jth

column, which in our table means sales by the ith industry to the

jth industry, i.e. input into j th industry from ith Industry, where

i = 1.....n, and j = 1.....n.

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In the upper right hand quadrant the disposal of output to users has been shown.

Here a single subscript that has been used indicates the origin of output.

Output

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In the payments quadrant the first subscript is ‘0’ and the second refers to the industry

making the payment for the primary input. We have assumed that there is no final

demand for the primary inputs, and therefore, the lower right hand quadrant is empty.

Payment Quadrant

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In the typical input-output table, of intra-industry transactions, such as x11 ,

x22 ,x33 and xnn. These imply that industries also use their own output as inputs.

To estimate net output of industries, which is the net of the use of the own output by

the industry as input, the diagonal elements x11 , x22 , x33 ,etc., would be zero.

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An input-output table highlights important relationships:

It shows that the row total of each industry equals its column total

which implies that the total output of the industry is equal to the

value of the total input employed.

It shows that the total output of an industry equals the sum total of

its output required for intermediate uses plus its final uses.

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Uses of Input-Output model

Input-output analysis has been generally employed for two main

purposes.

In all those countries which have adopted some kind of planning it

is used for achieving consistency in plans.

Big corporations use this technique for projection and forecasting

purposes. This enables them to plan for their investment and

production activities.

Forecasting: Under forecasting one predicts what will happen

on the basis of certain assumptions

Input-output analysis is used for examining what is economically

feasible. This is called as the simulation purpose.

Simulation: under simulation one remains concerned with only

what is economically feasible.

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Input-output relationships has been found useful in growth and

planning exercises of only those countries where manufacturing

sector is considerably developed, as a result of which there is

great interdependence between various productive activities.

A United Nations study lists the following uses of input-output

models in development programming:

They provide for individual branches of the economy’s estimates

of production and import levels that are consistent with each

other and with the estimates of final demand. 1/5/16

The solution to the model aids in the allocation of the investment

required to achieve the production levels in the program and it

provides a more accurate test of the adequacy of available

investment resources.

The requirements for skilled labour can be evaluated in the same

way.

The analysis of import requirements and substitution possibilities is

facilitated by the knowledge of the use of domestic and imported

materials in different branches of the economy. 1/5/16

In addition to direct requirements of capital, labour and imports, the

indirect requirements in other sectors of the economy can also be

estimated.

Regional input-output models can also be constructed for planning

purposes to explore the implications of development programmes

for the particular region concerned, as well as for the economy as

whole.

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Conclusion

This model is “primarily applicable in economies that have

achieved a certain degree of industrial development and

hence have a substantial volume of inter-industry

transactions".

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THANK YOU

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