Chapter 19 Input-Output Analysis 19.1. Introduction Input-output analysis is a technique which was invented by Prof. Wassily W. Leontief in the year 1951. This technique deals with the type of problems, one of which may be described in the following words : ' “What should be the level of output of each industry with the existing technology so that the total duiput goal for consumer and industrial use of its product gets fully satisfied; or alternatively, what level of output of each producing sector in. an economy can bring about equilibrium for its product in the economy as a whole.” “The basic idea behind this problem is quite simple to understand. Since inputs of one industry are the outputs of another industry and vice versa ultimately their mutual relationship must lead to equilibrium between supply and demand in the economy consisting of industries. For example, the output of industry 1 is needed as an input in many other industries and perhaps for that industry itself; naturally, therefore, the total output level of industry 1 must take account of the input requirements of all the industries in the economy. Exactly in the same way since the output of industry n enters into other industries as their “input requirements” the total output of nth industry must be one that is consistent with all inpitt requirements so as to avoid any bottlenecks anywhere in the economy. ‘Thus, the essence of input-output analysis is that, given certain tech- nological coefficients and final demand, each endogenous sector would find its output uniquely determined as a linear combination of multi-sector demand. Let us suppose that an economic system consists of n producing sectors: In order to avoid bottlenecks in the economy, the total output of each producing sector must satisfy the total demand for its product which, in fact, would arise because : 7 (1) Its product is being used as an intermediate product (i.e, inpu!) elsewhere in the industrial structure of production; and (2) lis product is used for household consumption, capital formatio® Government consumption or for export. For example, total output of agricultural sector ‘fay be used (°F demanded) : ;gr UTPUT ARALYSS 661 san input in food or other manufacturing sector (grain for producit } or colton for producing cloth); and @ ene yas final consumption by Government or households (vegetables or jn) and/or as an export demand. Let us assume that an economy consists of 4 producing sectors only; and spottieproguction of each sector is being used as an input in all the sectors and jsused for final consumption. ‘Suppose = (i) X,,Xq,X; and X, are total outputs of the 4 sectors ; (ii) Fy Far Fs and F, are the amounts of final demand, consumption, | formation and exports for output of these sectors. We can now translate the distribution of total product of 4 producing sectors in the following way : Input-Output Transaction Table capital Reguire- Total ments output of the sector for final We derive two important equations from the above table : (1) Columns 3, 4, 5 and 6 of the above table give us total inputs (from all Sectors) utilised by each sector for its production. In other words, col. 3 gives the production function of sector 1 and col. 6 represents the production function Of sector 4, X= fy Xi XavXov Xan Ly) X= fy Xie XeaXs0 Xan Lo) X= f, Ki Xo Xa Kay Ls) Xy =f, Sy X20 Xs Xew La) ree In general terms, if there are ‘n? number of producing sectors then the luction function of sector n will be represented by X= fy Ki Xow Xan o> Kay Ln) —662 INPUT-OUTPUT ANALYsis (2) RoWws of the table give us the equality betweén the demand and supply of cach product : Xe N yy eX tM t+ Xt Fy X= Xp, +Xq + Xqy + X44 Fo Xy = Xy, + Xqq + Nag + Xqq + Fy XyaXy +X t Xa tXagt Fy LeL,+L,413+L, In general terms, if there are n producing sectors : Kya Xy eX Xyy tonne Xig t Fy Xy=Xqy + Xp +Xpz t- X= X14 Xp Xyy + Leal, +L, +13 +L, + " * That is, X= Di Xy+F,,andL = L; eA a Here, X; = Total output of ith sector X;; = Output of ith sector used as input in jth sector, aid F, = Final demand for ith sector. “ ‘The above identity states that all the output of a particular sector could be utilised either as an input in one of the producing sectors of the economy and/or as a final demand, Basically, therefore, input-output analysis is nothing more than finding the solution of these simultaneous equations, 19.2. Assumptions ‘The economy can be meaningfully divided intoa finite number of sectors (industries) : ‘« 1. Each indust luces only one homogeneous output. No two products are produced jointly; but if at all there is such a case then it is assumed that they (produéts) are produced in fixed proportions. 2, Each producing sector satisfies the properties of linear: homogeneous production function—in other words, production of each sector is subject to constant returns to scale so that k-fold change in every input will result in an exactly k-fold change in the output.YSIS : gat _QUTPUT ANAL’ 663 3, A farstronger assumption is that each ind , : ve rtocion of pk inser wos, pt ets per no sl nr te tee (ost) uniquely determines the quantity of each input which is purchased, 193. ‘The Technological Coefficient Matrix From the assumption of fixed input Tequirements ra See that in order to roduoe one unit of jth commodity, the input'used of ith commodity must be a fixedamount, which we denote by, ag thus, a; = (%y VX;. If X; represents the {otal output of thejth commodity (or th producing sector) the input requirements of th commodity will be equal to a, X; or, %yaa,k, ira " As such we can now put the input-output transaction table in terms of technical coefficients as follows : Total Input requirements of Require- output of Producing sectors ments the sector forfinal uses Itshould be noted that all these coefficients are non-negative (>0) The above table gives us the total output of each sector in terms of echnical coefficients; and if there are “n” producing sectors : Xe aX, + apXo + ayXs + aX t Fi Kym ay X, + aX + Oy Xy + nvr + Ooh, + Fe Kraak, + aah, + aks + Lm, + BX + Xs + 1% XeD aX4Fs (F212 ww i=l664 INPUT-OUTPUT ANALYSIS. and, b= SX, The equations may be put in matrix notations : x, Ay Oy O43 on x, F, xX % a a % F, t 7 os : + x, G1 Fn2 9n3 x, F, X=AX+F and, L=E1,X; 19.4. Closed and Open Input-Output Models In the above example, besides n industries, our mode! contains exogenous sector of final demand which supplies primary input factors (labour services — which are not produced by n industries) and consumes the outputs of the n-producing industries (nov as input). Such an input-output model is known as open model. It jacludes exogenous sectors in terms of “final demand bill” — along with the endogenous sectors in terms of n-producing sectors. Input-output model which has endogenous final demand vector is known as closed input- output model. oo 19.5. Coefficient Matrix and Open Model Our open model in matrix notation is given by : X=eAXN+F where A is the input coefficient matrix, F is the final demand vector and X is the total output matrix, _ — ‘The input coefficient matrix represented by [ a; ] Aye yy 45 % I I st ie Fr Fn2 And is of great importance. Each column of this matrix specifies the input require- ments for the production of one unit of a particular commodity. The column, for example, states that to produce a unit of commodity 2, the inpuls needed are a, units of commodity 1, az), units of commodity 2, ayq units of commodity 3, and a,. units of commodity n. |. ' oo 665 yf industry uses its own Product as an input then, 0 ayy 43 we a, 0 ay G1 Fie An, f matrix will be (Note. Elements 0} be zero whenever the sectors do n trade with each other. It should be noted that no coefficient can be negative, * there can be nO negative inputs.) Coeffcient Matrix in Value Terms Again, if we assume prices of all the outputs tobe. given, the ijth elements of (a;) matrix will represent the amount of ith commodity in money terms needed for producing “a rupee worth” of jth commodity. For example, if a= 0.35, it means that 35 paise worth of ith commodity is required as an input for producing a rupee worth of jth commodity. . Also, in view of the presence of exogenous sector (which supplies primary inputs) the sum of the elements of each input coefficient column [a,,] must be less than 1, Each column-sum represents the partial input cost (excluding the cost of primary input) incurred in producing a rupee worth of some commodity; if this sum is greater than or equal to one rupee, the production will not be ‘economically justifiable. Symbolically this fact may be stated as : ) and each aij is non-negative, ie., either zero or greater than zero. The cost of the primary inputs (which is also termed as value added) needed in Producing a unit of jth commodity would be . 1-> a mn Note here that 4; are in value terms. Solution of Open Model Let us consider an economy with n-industries. If producing sector 1 is to Modice aN output just sufficient to meet the input requirements of the » str Z i¢s as well as the final demand of the exogenous sector, its output level 1 MUSt satisfy the following equations :666 INPUT-OUTPUT ANALYsig Kym ay ky + ayQXy + aygXy one Oy Xy + Fy Ot, (Aa Ky — ay g¥g— aap oo () Oy Xq Fy For the entire set of -industries, the correct output levels, therefore, can be symbolised by the following set of n linear equations : (1 yy) X, = ypXp — Oyghg — oe — Gah Fy = Oa,X; + (1 = yg) Xp — OM — oe — Gag = Fy = OyaXo — OygX3 - In the matrix notation this may be written as : i a vy a.) Xn =F, (l-ay) -ay xX, Fy, —ay (1-day) x, F, ~ay, ay 4% Ps x, F, W-AlX=F thatis, - X=([-AJ"F Wearrive at the same result if we take the equation derived under section 193. X=AX+F or, X-AX=F or, [-A]X=F - X=™l-A]1F where A is the given matrix: of input coefficients, while X and F are the vectors of output and final demand of each Producing sector. If |1-A | 0, then [7—A T* exists, we can then estimate for either of the two matrices X and F by assuming one of them to be given exogenously. It is here that we observe that assumptions made in input-output analysis goa long way in making the problem simplified. For example, with the assumption of linear homogeneous function, it is Possible to write a linear equation of cach producing sector which then can be easily transformed into matrix notation.% ye PUT. ‘ANALYSIS 667 on the other band, as long. as the in; the matrix Awillnot change or [I-A] will not change. Therefore, in a the solution of X = [I -A}" only one matrix inversion needs to be soled even if we are to consider thousands of different final demand vectors ing alternative devel ‘opment targets, Hence such an assumption of fixed nical ‘coefficients has meant considerable saving in computational effort. we Ex. 1. Suppose there are only three industries in an to estimate the output of each (sector) industry wit coefficient matrix and final demand as follows (the coe! ‘value terms) ¢ put coefficients remain fixed (as economy and we ith the given input fficient matrix is in P+ QR 03 04 02 100 A=|02 0 05 | and, F=| 40 | million rupees. 01 03 0. 50 Here we note that 3-column sums of A arc (0.3 + 0.2 + 0.1) = 0.6, (0.4 + 0+03)=0.7 and (0.2 +.0.5 + 0.1) = 0.8 ; which are less than 1 in each case. In other words, (1 - 0.6) = 0.4, (1 - 0.7) = 0.3 and (1 - 0.8) = 0.2 is the maximum amount of primary input which can be used for producing “a rupee worth” of the three commodities (P, Q and R) respectively. 03 04 02 0.2 0 OS 0.1 03. 01 407° O04 02 02 +1 05 O01 03 +09 Since A = 3 (I-A) = Substituting these values inX = [I-A JF, we get : - x 07 04 02 100 x=|x,|-| -02 1 05 40 xX; 1 03 09 50 07 04 02] , [075 042 022 Bu} 02 1 05 | =-+ | 023 061 039 0.1 03 09 0401) 9.16 0.25 0.62 xX, 0.75 042 0.22 100 x, |=] 023 061 039 || 40 x, | 41 | o16 025 062 || 50 fy el 5 Xs 75. (100) + 0.42 (40) + 0.22 (50)} 1 = Gop {0.75 100) + 048 = Rs. 279 million (approx.)Xe — {0.23 (100) + 0.61 (40) + 0:39 (50)} a, 668 INPUT-OUTPUT ANALY sig = Rs, 167 million (approx.), and X35" an {0.16 (100) + 0.25(40) + 0.62(50)} = Rs. 142 million (approx.) We may ask another question. What amount of primary input would he needed to get the above amount of out million) in three producing sectors ? Would the amount so required be con: with what is available in the economy ? fent We have already mentioned above that the maximum amounts of primary inputs (in money terms) required for producing ‘a Tupee worth’ of commodities in the three sectors are : 0.4, 0.3 and 0:2. Therefore, the total primary input Fequirements (of the thre sectors) will be equal to : 0.4 (279) + 0.3.(167) + 0.2 (142) = Rs. 190.1 million. We may also, therefore, say that the specific final demand; 100 40 50 Pu be feasible if and only ifthe available amount of primary input is at least Bs. 190 million. Ifthis amount falls short, the calculated production targets will have to be revised downwards accordingly. 19.6. The Hawkins-Simon conditions (The viability of the system) Many atime input-out put matrix solution may give Outputs expressed by negative numbers. If our so! lution gives negative Outputs, it means that more Of that product is used up in the Production of every s,which is definitely an unrealistic Situation. Such a system is not a viable system, Hawkins-Simon conditions Suard against such eventualities, Our basic equation is X= [I-A TF, in order that this does not give negative numbers as a solution, the mat ix [I-A], which in fact is : (1-a,,) =a ~a, ~% (1-ay) ~ — ayy — an 7 Ang i669 1d be such that + (ay the determinant of the matrix must always be positive, and (2) the diagonal elements : (1-41), (1 = yg), (1 gg) 9 oem (1 -4,,) pout all pe positive of in other words, elements : a, 4, Should ibe ess than ong. Thus, one unit of output of any sector shouid use not more 1 unit of its own output. . than 1 Ul ese are called Hawkins Simon conditions. 08 02 Ex.2. suppoetAl=| o9 + 07 0.2 -02 u-aie| -09 03 | and the values of determinant of [JA] will be 0.06 - 0.18 = (-) 0.12 which is less than zero. ‘Assuch Hawkins-Simon conditions are not satisfied. No solution will be possible in this case. ‘Ex.3. The following inter-industry transactions table-was constructed for an economy for the year 1990. Tout [200 | Construct technology coefficient matrix showing direct requirem: Does a solution exist for this system ? _ Technology matrix showing direct requirements per rupee of output is obtained by dividing each input by the total output of the sector. ‘That is, jents.670 INPUT-OUTPUT, ‘ANALYsis" I ' Hence technology matrix is given b} j Industry 1 2 : nS As 1 0.20 0.20 2 0.70 0.20 ; “Tabour 0100.60 Oe OG O00 -0.20° -020)_/ 080 -.20 | and 1-A} = ( 17 -0. -0.70 0.80 j 0.70 1-0.20 | | 080 0.20 | to Al | -0.70 080 = 0.80 x 0.80020 x 0.70 = 0.50 i Since |1—A | is positive and all elements of the principal diagonal of (I~ A) are also positive, the Hawkins-Simon conditions are satisfied Hence, the empirical system has a solutiog,g x Ex.4. Given: 01 03 O41 A=| 0 02 -02 0 0 03 and final demands are F,, F, and Fy. Find the output levels consistent with the model. What will be the Output levels if F, = 20, F,=Oand F, = 100? We know that x, .. ay =| %)=d-ay'| F xs F; 09 = -03 “-01 Now, MI-Al=] 0 og ~02 |, 0 o 07 Co-factors are as follows : 08 _ Aun] O02 | = 056 =-|9 -o aae-| 9-92] 2g tons | 2 8]. -03 oy Ay=- 2. | 0 07 | = 0.21put OUTPUT ANALYSIS i ‘ on _, | 09 -O1 4n=+) 9 07 | = 0.63 09 -03 Ay =~ | 0 0 | =0 _, | -03, -O1] _ 9), An =+! og 02 | = 0.14 j __}o9 -o1] _ ¥ An Fo | 0 -02 | ew. _, | 09 -03 | _ Ags = + | 0.08 | = 0.72 Hence the value of the determinant is. 0.9 x 0.56 = 0.504 Me sa fo56 021 0.14 Hence, (-Ayt =| (0 063 0:18 , 0504) 9 0 072 111 0.42 0.28 z =}, 0 125 036 5 0 0 143] x 111 042. 0.28] [Ft X,| = 0 1.25 0.36 | | Fo x; o 0. 1.43 | | Fs xX LALF, + 0.42F, + 0.28F xX, | = 0 +1.25F,+036F; X; 0+ 0 +143F, From the given values of F,, F2 and Fs, we have, X= 111F, + 042K, + 0.28F = 1.11 x 20 +0 + 0.28 x 100 = 50.2 Xp= 1.25F_ + 0.36F5 0 + 0.36 x 100 = 36 and, X50 143F3 = 143 ley Note. It is to be noted that if the technology matrix is upper triangular, » ifall elements below the main diagonal are zero or nearly zero, then (I-A)Posny Ae 672 INPUT-OUTPUT ANALYs1g mairix will also be triangulz demand of sector 3 and. X, on final demards of sector 2 and 3. Ex.§, Inthe above ‘example, if final demands change by 10, 10, 10, then what will be the change in sector outputs ? We have X=(l-A)'F 7 AX = (I-A) AF Where AX and AF are vectors of small changes in outputs and final demands Tespectively. Hence 11 0.42 0.28 10 Ax=| 0 125 036 | | 10 0 0 1.43 10 AX = 1.11 x 1040.42 «28 x 10 = 181 AX, = 0+ 1.25 x 10 40.36 x 10= 16.1 AX; = 143 steel and 0.6 tonne of coal are required to Produce a tonne of coal. No capital inputs are needed. Do you think that the system is viable ? 2 and 5 labour days are required to Produce a tonne of coal and steel Tespectively. If the economy needs 100 tonnes of coal and 50 tonnes of Steel, calculate the gross Output of the two commodities and the total labour required. Determine the equilibrium prices, if the wage rate is Rs. 10 per man-day. Here the technology matrix is given as under : Steet Coal Final demand Steel 04 0.1 50 Coal 07 06 100 Labour 5 2 06 -o1 ° “ t-A=( 05 04 The system will be viable if Hawkins-Simon Conditions are satisfied ? (@ The diagonal elements of (1 A) are all positive, (id) The determinant should be Positive, SST,OUTPUT ANALYSIS ynPuT- 673 In present problem it is : 0.6 x 0.4 - 0.7 x 0.1 = 0.24 - 0.07 =0.17>0 Hence the system is viable. The required gross output is given by : X=(-A)'F -(.0% “@) (8) _1 (04 01)/ 50)__1 / 20+10 176.5 0.17 | 0.7 0.6 }\ 100 } ~-0.17 | 35+60 (5553 | Total labour days required are : [5 x steel output + 2 x coal output =5x 176.5 + 2 x 558.8 = 882.5 + 1117.6 = 2,000 labour days.] (For last part see Ex. 7) 19.7. Solution for Two Industries ‘Assume that the following information is given to you: Sector of origin Sector of destination Final demand xX, % x, 1 ay, a2 F 1 X, ay % i Primary input ik b where 1, and 1, are labour (primary input) requirement for producing one unit of commodity 1 and 2 respectively. a, 412 me a(S) Hence, xXe(d-Ay F - tea, -4) (Fi . =| -ay 1-4n Fa 1(An 4a) (Fr) 4 Auk, + Anke =p\l Ap An} |)" 2 AF + Arlt?674 , INPUT-OUTPUT ANALYSIS x = Auf +AnF i D 1 ApF,+4nFo | cn where D is the determinant of (I-A) and Ajj, Ap, «+» the co-factors of the matrix I-A Here, of course Aye lady 5 Ayg a » Ag = 42 » A= 1- ay, and D=(1—ay) (1-441) - 2112 Total labour requirement will be : x, (h a i eux = 1X, where 1 is the row vector of labour coefficients. 1X, + bX: If there.are two primary inputs then the primary input coefficients can be arranged as follows : Sector 1 Sector 2 Input.1 (Say labour, L) hy he Input 2 (Say capital, K) a ln hy | , Re Lh 12 ( ky ln Hence factor requirements will be given by : L fy by ™ (£)=( kg] memrenocane Factor demand vector = R(- A)" F Solution for 3 industries. It can be seen easily that in the case of 3 industries, the solution will be 1 os X= plAuk +AnF y+ Ags ] 1 X1= lnk +An Fy +AyF3] 1 X3= pl AF +4n Fs +433 F3] Lpour ouTrUT ANALYSIS. os and total labour requirements will be » Lah Xy + bX, + bX, ‘This is equilibrium or consistency condition for 3 industries. Matrix Multipliers . ; .” What is the effect if final demand for any one commodity changes? Differentiating the expression for X,,X,,X, and L with respect to FyF,andF we have Au % Av as Ay @ OF, D’ aX," D’ oF," D * aL _, OX, | ak, | as i aa oar SF, +) 1 - plu t bn tA] oli) ‘Thus all these multipliers are constant, given the technology matrix. Let us watch our results closely. They tell us that a unit change in final demand of commodity will necessitate a change in output of commodity 1, 2, Au Av 4 43 ‘ 7 son ic i and 3 by St, 522 and [> respectively. If all the information is in value terms, this will mean that total output wiil change by : Au, 4a, Aa a) and total demand for labour will change by + HAntbAntlAs D D Now inverse matrix A. In general, therefore, any column of the inverse matrix shows how much output in each industry / will rise ii the final demand for the product of industry j rises by a rupee or a unit of product’sn These are thus matrix multipliers, 198, Determination of Equilibrium Prices Let the prices of commodities 1, 2, ns b€ py, Py nnn tespectively, and the price of the primary factor’ inputs be w, then the technology matrix or AytA futAnt”s| 2 a ‘| is nothing but the sum of the first columr: of the Ineiga THE COB primary Taps Includes labour, interest, import, profit and deprecation. 1 Includes all costs other than those ou the inter-industrial purchases.676 INPUT-OUTPUT ANALYsig transaction matrix in quantity may be converted into that in value terms. The problem can be posed as follows : ay Xips an Xpi an Xn anXyr aur Xi pi + 021. Xi pz +h Xi w | air X2 pi + a2 X2p2 + 2 X2w Final demand Primary input Total cost ‘With pure competition and free entry profit in each industry must be: zero, ie., receipts equal costs. Hence for the 1st industry receipts are output x price and cost is ay,Xyp, + dy:X pp + 1yXw. Similatly for the second industry. ~ Hence, for equilibrium; PX = ay; Xp, + Oy, X, py Xyw P2X2= 2XoP) + An Xp Pp + XW which simplify to P1~ 4 Py ~ 4 Pp = hw and, ~ 412 Pt + P2- Mp Pp = sw which can be put in matrix form as under : (=a) -ay ea” ome [l= [25 Notice that the set of coefficients here are transposed, this matrix is transpose of (I-A) Py] _[G-a) -ay' yy [2)- Eo? oa] [seer 0 where V is the vector of Primary cost or value added coefficients. 1 Pity (Al +h) w D Aul+Ayh 1 Pop (Aah +Angly ) w where Ay Ayo, ele, are the Co-factors of the matrix (-A) as in the preced- ing cases.-QUTPUT: ANALYSIS, yer 677 For the three industry case 1 P= DUA +A + Ayy hw 1 Pa= 7 [Ani hy + Aza by + Ags by] w 1 Ps= DU +AnhtAyhlw We already know from Section 19.7, eq. (iii) that total employment is given by + L= WX) +hXy,+hXy a_i and, ar, = DU An + br +b Ans) wal 1 so that, ‘OF, = DL An + WA + LWA) 1 pvr Ann + Wola + WA) Here, = wl), w2 = Wl, W3 = wl, are wage costs per unit of output. . 1 Also, P= pun wy + Ajaw2 + Ai3ws], from eq. (é) above, OL Pi= 5p, =. wage rate X marginal employment = marginal labour cost. Ex. 7. In Ex. 6 determine the equilibrium prices if the wage rate.is Rs. 10 per labour day. . 40.1 Given A= (oe any _ ( 0.6 “Ay T-A=\_o7 04 , (0.6 -0.1 -Ay = (an oa) (R)=(08 oa)” (x to) Y| 678 INPUT-OUTPUT ANALYsig 1 f 04 07). (50 “p17 | 01 06 20 ~ 1 20414] _ / 200 0.17 | 5+#12 100 P= Rs. 200 per tonne, p, = Rs. 100 per tonne. 19.8. Determination of Value Added We already know that any row (i) shows the sales of jth industry and any * column (j) shows the purchases of industry j. Now let all the transactions be given in value terms. Then rows give receipts and columns costs. ‘Value added is defined in two ways. ‘The gross output of each industry minus its inter-industry purchases equals the value added by the industry. This value added equais the wage, interest and rental payments and the profits of the industry—i.e., the payments to primary inputs, . Let us consider a hypothetical input-output table. Cost of primary input 5,050 (value added) Total receipts/ Gross output For Industry 1; output = 2,500 of which Inter-industry purchases = 500 + 1750 = 2250 Hence value added = 2,500 — 2250 = 250 which is also cost of primary inputs Similary for industry 2; Value added = 8000 — (1600 + 1600) = 4,800 . Hence gross value added is 250 + 4,800 = 5,050 Now looking from the sales or disposal point of view; Sales to final consumers by Industry 1 = Total sales — Inter-industry salesgUTPUT ANALYSIS 679 = 2,500 - (500 + 1,600) = 400 py Industry 2 = 8,000 - (1,750 + 1,600) = 4,650 Hence total disposal to final demand is = 400 + 4,650 i 650 = 5,050 which i joe ual to total value added. Hence, the following definition. ™ Payments to primary inputs = Factor cost = Vi _ . come = sum of value added in each sector alnd'aidded = National ‘Also sales to final demand = Final demand = G . genand = NNP (Net National Product) = NI (National Treacy le for Final = (X41 X10) + aX 220) + a (My Ny tons) — Coy, Hy tay toe ) = Gross output — Inter industry transactions Hence, aggregate final demand must equal aggregate gross value added. (Note that in this simplified model we have neglected depreciation, taxation and foreign sector.) ‘Thus, value added (V) is also the total factor cost. It is, therefore, equal to LyX, + LwX,+ LwX, + - " lw V=% % %)| bw lw ' lw =x | Lw |= (aw le hwiX lw Ex. 9, In our two-sector model of Ex. 6, we have 1 2 z 1 0.4 O14 50 2 0.7 06 100 l 5 2 We had found out that X, = 1765, X= 558.8 Hence, given w = 10 and I,w = 50, [pw = 20, we obtain 1 50 vem, Ral (1765 558.8) (2) 12 176.5 x 50 +5588 x 20 = 20,000 approximately.a 680 INPUT-OUTPUT ANALYsig Alternatively, we had calculated total employment or factor demand at 2,000 days, hence V = 2,000 x 10 (wage rate ) = 20,000 Or, V can be found from the value of the final demand, From Ex. 7 we know that, P\=200, pp=100, F,=50 and F, = 100 Sothal,, Ve pF, +p,F, = 20,000 Note : We have taken final demand as one sector’s (household Sector’s) Gemand only, but more generally final demand is composed of (i) Household Consumption demand, (ii) Investment demand, (iii) Government purchase of goods, (iv) Net export demand, and (v) Change in inventories, Similarly, we have taken labour as the only primary input, but land and capital are other primary inputs and labour can also be divided into many types, 19.9. Coefficient Matrix and Closed Model ‘We shall now examine whether we will be able to estimate For X ifthe model is changed into closed one. If the exogenous sector (final demand bill) of the open input-output model is absorbed into. the system of endogenous sectors, the model would tum into a closed one. In such a model final démand bill and primary inputs will not appear any more; rather in their place, we shall have the input requirements and output of this newly conceived industry, the “household industry’ producing the primary input labour. Final demand sector would now be considered as one of endogenous sectors. As such now we shall have (n + 1) industries in place of n industries and all Producing for the sake of satisfying the input requirements. This newly conceived industry (of final demand bill) will also be assumed {o have a fixed input ratio as any other industry. In other words, the supply of Primary input must now bear a fixed Proportion to final demand (i.e., consump- tion of this newly conceived industry). This will mean, for example, that households will consume each commodity in fixed proportion to the labour services they supply. Looking at the problem in this particular way, it appears that the conver- sion of open model inio a closed one should not create any significant change in our analysis and solution because disappearance of final demand nteans only an addition of one more homogencous equation to already existing set of n homogeneous equations. Is it really so ? Let us examine. Let us assume that there are four industries only — including the new one (of final demand) designated by subscript 0. We shall, therefore, have the following set of equationyTPUT ANALYSIS yout 681 Xo = dog Xo + do, Xy + gy X, + ay X5 X= Ay Xp + 44, X1 + a) X) + ayyX, Xq= day Xo + Oy, X; + OX, +X, Xy= aX + 5, X, 4.055%, 4.05%, ‘This gives us a homogeneous equation system (1-4) = 01 ~ Mp =~ a3 Be 0 ~ ay (l-ay) - ay =a xX 0 -ay a, (1-day) -ay xX, |" | 0 a) — 4% ~ 432 (1-ay) | X5 0 [I-A] X=0 Since the 4 rows of the input coefficient matrix happen to be linearly dependent, | I - A | will turn out to be zero. Hence the solution is indeter- | minate. . | This means that in a closed model no unique output-mix of each sector exists. We can at most determine the output levels of endogenous sectors in proportion to one another, but cannot fix their absolute levels unless additional information is made available exogenously. We reach the same conclusion by analysing the model in a slightly different way. Let us now assume a competitive economy of three producing sectors. Wetransform the output and inputs of each sector into its receipts and payments by taking into consideration the prices which are endogenously determined : Receipts: SI P,X,=PyaXy+Pyao%o+PiasXs+ PF, Sil P,Xp=Pyaq,X,+P24nX2+PadnXs+PoF2 «++ Q) SAI Py X= Ps a5, X, + Ps day Xo + Ps Oss X3 + Ps Fs , At point P;, the input from sector 2 : ny = 1. (a1) = a2 (= OM) while Labour input, 1, =1,.(1)=1,(=ON,) PM 4h The slope of OP, = 4 L ay Since the input coefficients Temain constant, hence the slope of the ray OP, remains constant. O, Py, P,P, ate on the same ray. All along this ray, no input is wasted. Obviously, OM = 2a, or, ON2 = 2h; and slope of OP, = A ; Hence in order to double the output of X,, doubled, if there is to be no wastage. Consi R.HSS. of the isoquant X, = 1 output. both the inputs should be exaly ider, however, the point Q, on the Here labour is only ON,, just sufficient to produce one unit of X;, but input Xp is as much as OM;; thus input X, will | be wasted up to My Mp, Similarly labour input will be wasted at R and all points on PR. Of course, both inputs cannot be wasted, If L and Xp are used in larger quantities, then we shall be on second isoquant above X; = 1, 19.12, Dynamic Input-Output Model ‘The Leontief input-output model has appeared in a number of modified forms. We have discussed above how the model can be changed to an open or loring the exogenous sectors, Here we shall discuss @ dynamic form of input-output model in which specific account is taken of inter-relationship of the current and past outputs, In our static open model we assumed that current output can be used for cirrent consumption and/oras current input in Production of some other outputs. But in a dynamic model it is assumed that the current output can also be used (along with these two Purposes) as an addition to industry’s inventor stock and fixed capital formation, v 9 The balance equation will, therefore, be XpnXiy +X yt Xy Xint AS SytF, det ' : = Cad ad nan yd, A} Dg) | + 1, fs :INPUT-OUTPUT ANALYSIS 687 HereX;s the total output of ith (endogenous) producing sector in period 1, which is used for three purposes ; (i) as an input for Production in economy’s n-industries : = Kade + Kadi t Kinde os Kids (#) as remaining final demand = (F,), (which now includes purchases by government sector, households and foreign sector (iii) as an addition to the stock of ‘n-industries : [3 If depreciation is ignored, the net addition to stock of ith Output in the n-produc- ing sectors will be equal to the difference between the current year’s and last year’s accumulated capital. EL BeBe. But since we assume that there is fixed relation between capital and output: S; by = 70 that bj O,# Si, by Xa = Spa Therefore, the balance equation of dynamic model tums out to be : n " CD, =D yet H+ D by[ D- Her ] it it This is a basic equation of dynamic model representing a set of first order linear difference equations with constant coefficients : a's and by's. Another way of formulating thc dynamic model is us follows : Let the Investment demand by sector j be Jj, = bj (Xj— Xr): where b, is the acceleration coefficient, In matrix notation I= 5 (X,-X,1)688 INPUT-OUTPUT ANALYsig Tn the continuous case the above relation will be (i Now, in order to transform these aggregate figures of capital formation (C.F) by sector of use to sectors of origin or to demand for sectoral outputs, a capital formation matrix has to be defined, let it be by by pala on bn One by bay, «++ by: ate the coefficients defined as : b demand for ith sector’s output by sector 1 for C.F, ia = CR. in sector 1 _ demand for jth sector’s output by ith sector 1 for CF. Similarly C.F, in sector i Hence the vector of investment by origin is = Bb’ (X,—X,.,), (in discrete form) = Bb’ a (in continuous case ) Hence the Leontief consistency conditions are X,+AX, + F,+ Bb! (X;—Xz4) (This will be a discrete case) X=AX+F+Bb’ a (This will be a continuous case) ‘Thus the systen may be described in first order difference or differential equations. However, in a dynamic (model) situationit is better to use the inequalities to account for overproduction and excess capacity. Even for the given set of consumer goods which the economy wishes to tum out, different production Patterns will arise depending on the quantities of the various goods which it is decided to put in the capital investment. [t Sives us a unique set of output Fequirements for any set of final output goals, Production goals can be achieved by a variety of means and somehow society must make up its mind among them; Presumably on the basis of some sort of optimality computation, Planning fot Jong term cannot be reduced to a simple matter of solution of a system of Simultaneous equations as in the input-output case,QUTPUT ANALYSIS INPUT- 689 19.13. Limitations of Input-Output Analysis (1) Errors in forecasting final demand will have grave consequences. (2) Current relative prices of inputs may not be sat tl 2s impli inthe table. pt y me as the ones implied G) The assumption of linear homogeneous production function may not be valid. The technical coefficients will not remain constant even if input price ratios are held constant in such circumstances. : (4) The constant coefficient formulation ig industry output reaching capacity, changing prices an table. | (5) The assumption of constant technics possibility of substitution of inputs. nores the possibility of \d input proportions in the .al coefficients goes counter to the (6) Sectoral division is, for practical purpose’, limited. Such a sectorisation is not good enough for many forecasting purposes. (7) Sectorisation (grouping of commodities in sectors) is often arbitrary, ‘The intra-sectoral heterogeneity with respect (0 technologies, efficiency and demand is not invariant over time. (8) Regional input-output analysis involves many more assumptions and difficulties in construction of such tables. EXERCISE 19.1 input-outp! (A) and manufacturin ut coefficients for a two- g industry (M4). 1. The following table gives the f agriculture sector economy consisting of ' justries is 300 and 100 units respectively. the two ind the two industries. ‘The final demand fo Find the gross outputs 0. coefficients for labour for the two industries are Assuming the input : respectively 0.5 and 0.6, find the total units of labour required. yw MM a wt An|” % M4 mw MMag 690 INPUT-OUTPUT ANALYsig { 10 and the final demand vector = | 28. 14 Find the total output of the 3 sectors. What will be the total outputs if the final demand for sector | has increased by 1 ? 3. Consider upper triangular matrix 04 02 03. A=|0 O01 03 0 0 02 (a) Calculate (I-A) (®) Take first element (a;;) to be 0.3 and calculate (I—A)7 (©) Formulate a general rule for the inverse of (I-A) if A is triangular @) In this case what is the special nature of the relationship between X and F or AX and AF ? 4. Find the demand vector D which is consistent with the ‘output vector 25 X=| 21 |, when the input-output coefficient matrix is 18 02 03 02 A=|04 01 02 01 03 03 Also compute the gross value added in ea in each sector and total final demand are 7611 5. = It F ) , ich sector. Show that total value added both equal to 1. ={ 0.204 0.089 0.037 0.441 find X and value added in each sector, (Hint Value added in each sector is given by : Vin X~ aX, aX, Vom X~ aX ~ ay9X>) 6. Inexercise 5, if final demand for s : . ectors | and 2 increases by 4.25.and us Per cent respectively, calculate the Fequired increase in output of each sector.INPUT-OUTPUT ANALYSIS 61 [Hint : AX =(I-Ay" ar ap. ( 32347 15031 } 7 If = 02 04 4 (01 os |r 4 F-( 0): find X and V. 8. In the above problem, assume gross value added increases by 5% and income elasticities of demand are 0.5 and 1.5 for sectors | and 2 respectively. Calculate the balanced growth targets. (Hint. If population growth rate is zero, growth in annual demand is equal to the product of growth of income and income elasticity of demand, hence 81 = 055 x -05 = 0.025 82 = 15 x 0-05 = 075 AF = 60 x 025 = 15 AF, = 40 x .075 =3.0 and then proceed) 9. In the above exercises if the marginal capital output ratios are 2 and 3 respectively, calculate the total investment required for balanced growth. 10. From the following coefficient matrix find out the final output goals of each industry assuming that consumer output targets are Rs. 80 million in steel, Rs. 300 million in coal and Rs. 50 million in railway transport : Steel Coal — Railway transport Steel 03 02 02 Coal 0.2 O01 OS Railway transport 0.2 0.4 02 Labour 03 03 01 What would be the labour requirement of the three industries ? (Hint, In the above question : 03 0.2 0.2 80 Az|02 1 05 | and F=| 30 |’ 02 04 02 50 +407 -02 -O2 . peAje]-02 +09 -05 & Gaal 02 -04 +08692 INPUT-OUTPUT ANALYSIS Substituting the matrix, we get the required result. x, 07 -02 -02]' [80 Xe| X, | =| -02 09 05 30 X; -02 -04 08 50 11. From the following matrix find the final output goals of each industry assuming that the consumer output targets are Rs. 85 million in steel, Rs. 25 million in coal and Rs. 55 million in railway transport : Steel Coal Railway transport Steel 0.4 O1 0.2 Coal 9.2 0.2 0.4 Railway transport 0.2 03 0.3 Labour 0.2 0.4 * O1 ‘What would be the labour requirements of the final outputs of three industries? 12. If the consumer output requirements are Rs. 80 million in steel, Rs. 20 million in coal and Rs. 55 million in railway transport, determine from the following matrix the final output goals of each industry : . Steel Coal Railway transport Steel 02 02 03 Coal 04 0.1 03 Railway transport 0.1 03 03 Labour 03 0.4 0:1 Estimate the labour requirements for final outputs of three industries. 13. From the following matrix determine the gross level of output and labour requirement of industries AyB and C : A B_— C_ Consumer’s requirements A 01 0.2 0.4 Rs. 40 million B 03° 0.2 0.1 Rs. 50 million “ 02 04 03 Rs. 80 million Labour 02 03 03 14. From the following technological matrix and final consumer require- ments determine gross levels of output of 3 industries A, B and C : A. BC Consumer requirements a 0.2 04 0.5 Rs. 70 million B 05 01 0.1 Rs, 60 million C 0.1 02 0.1 Rs.90million Labour 02 03 03 What will be total labour requirements ?re INPUT-OUTPUT ANALYSIS 693 15. What are the possible explanations of fixed input coefficient in an input-output system ? . Se eas technological matrix and the consumer require- ments, ross levels of output and labour requirements of the three industries A, B and C: 4 A BC Consumer requirements A 0.2 0.3 0.2 80 (Thousand Rs.) B 05 04 03 1220 =” Cc O1 0.2 0.2 90” Labour 0.2 Ol 03 16. A three-sector input-output matrix [I-A] is given as : 1 -05 0 -02 1 -0.5 -04 0 1 With labour coefficients (per unit of output) as 0.4, 0.7, 1.2, if the household demand for the outputs of the 3 sectors is 1,000, 5,000 and 4,000, determine the level of output and employment. If the wage rate is Rs. 10 per labour day, find the equilibrium prices and the total value added. 17. Let the technology matrix be ' Sector 1 2 3 1 0.1 03 0.1 2 0 02 - 02 3 0 o 03 If the final demand functions are given by : F,=01y+@, Fy= 03) +0 Fy=0.dy +23 where y is the national income, then obtain expressions for X ,X,and y. x, 2.847 2153 2014 1.736 \ | & 2589 3.839 2.946 2.589 | | & =| 9857 2.857 4.286 2857 | | © 5,000 5.000 5,000 5.000} | 9 Si Hint. int | y94 INPUT-OUTPUT ANALYsI5 18, Appraise the following critical assumption of the input model of production: (@ Linearity, (b) fixed factor proportions, and (c) fixed product mix (that is, fixed proportions among the joint output components). 19, Discuss how the technique of inter-industry analysis could be used in constructing planning models, Discuss implications of assuming fixed technological coefficients. Mention and briefly discuss any planning model you know of which is based upon the framework of inter-industry analysis, 20. Outline Leontief’s analysis of inter-industry relations distinguishing the assumptions relevant to the ‘Open’ and ‘Closed’ systems. 21. Prove that in a Closed Leontief System, if there is any economic activity at all, the absolute levels of activity are indeterminate. 22. Outline mathematically the Leontief dynamic model. Prove that the normal dynamic Leontief system has only a special initial configuration leading to balanced growth. Further prove that if such a configuration exists the Leontief trajectory is an efficient path, 23, Explain the main features and basic assumptions of input-ouput analysis, and comment on the statement that basically the input-output analysis is nothing more complicated than the solution of a set of n-simultaneous linear equations in n-variables. 24, How is input-output model used in checking the consistency of targets and in the assessment of resources ? Can it be used to assess the disaggregated multiplier effect ? 25. Explain the significance and uses of the simple input-output system X= (I-A) Dj where A is the coefficient matrix, D is the final demand vector and X is the gross input vector, Show that the aggregate final demand must equal aggregate gross value added, 26, (a) An economy produces two commodities, Say x and y. The two commodities serve as intermediate inputs in each other's Production. 0-4 unit of x and 0-7 unit of y are needed to produce one unit of x. Similarly 0-1 unit of x and 0-6 unit of y is required to produce a unit of y- Do you think the system is viable ? (b) 2 and 5 labour days are required to produce a unit of x and y respectively, If the economy needs 100 units of x and 50 units of y, calculate the gross output of the two commodities and total labour required. Determine equilibrium prices if wage rate is Rs. 10 per day.