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Input-Output Models

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Input-Output Models

Developed by Wassily Leontief in 1936, input-output models are an alternative to simple economic
base and Keynesian approaches to modeling an economic system. Essentially, the models are used to
describe and analyze forward and backward economic linkages between industries. They compile the
industrial activity of an economic system into an input-output table that is built around a matrix of
monetary transactions. These transactions can be recorded by industry or sector, which are groups of
industries involved in similar production processes.

The basic principle of input-output models is that the products sold (outputs) from one industry are
purchased (inputs) in the production process by other industries. Therefore, it is plausible that a
change in one interindustry linkage can affect the entire system of linkages. For example, the steel
industry uses inputs of coal (outputs from the coal industry) to produce goods. These goods are then
purchased as inputs in production by other industries, such as the construction industry. What would
the impact of a rise in demand for goods produced by the steel industry be on the construction
industry, other industries, and the entire economic system? An input-output model could be developed
to address these interindustry interdependencies. This type of information provides geographers with
a disaggregated view of an economic system in that industries are connected on the basis of buyers
and sellers.

Data on the economic linkages between industries are typically collected from surveys of the economic
system being modeled and compiled in a table. The table is constructed around a matrix of monetary
transactions. The transactions that take place between industries represent a flow of goods and
services. They are tabulated based on the value of sales (outputs) and purchases (inputs) of
intermediate goods between industries. Like any table, an input-output table consists of a series of
columns and rows. The rows of the table reflect the value of sales (outputs) made by each industry.
Sales can be further divided to represent sales to final demand. In these categories are included sales
of output made to the consumer (households), sales to government (local, state, federal), sales of
investment goods (capital equipment), and sales destined to be outside the economic system being
modeled (exports). The columns of the input-output table reflect the value of purchases (inputs) that
are made by each industry. Purchases can be further divided to represent purchases from value added
and purchases of imports. In these categories are included returns to capital (profits and dividends),
labor costs (wages and salaries), and purchases of inputs made from outside the economic system
being modeled.
Table 1 Basic input-output table showing general forward and
backward linkages between Industries X and Y

Source: Author.

Establishing general forward and backward economic linkages between industries is fairly simple with
input-output models (see Table 1). In locating the value of sales (outputs) and purchases (inputs) in
the table, it is necessary to become familiar with the intersection of rows and columns and what each
represents. Consider a linkage between Industries X and Y, with Industry X as the seller. To find the
value of sales made from Industry X to industry Y, locate the selling Industry X along the left side of
the table and then read across to find the purchasing Industry Y at the top of the table. This would
show the value of outputs that are sold from Industry X to Industry Y. Following the previous
example, now consider Industry X as the purchaser. To find the value of purchases made by Industry
X from Industry Y, locate the buying Industry X along the top of the table and then read down to find
the selling Industry Y along the left side of the table. This would show the value of inputs that are
purchased by Industry X from Industry Y. Essentially, one-way or multiway economic linkages among
industries are possible with input-output analysis. However, analysis of more complicated linkages
requires knowledge of matrix algebra.

Input-output models have varying degrees of openness and closure, meaning that there is no
guideline set for determining how many categories of economic activities, final demand, and value are
added to include or exclude when developing the model. This largely depends on the analytical
purpose of the model. Its use has been extended from the most basic, describing interindustry
relations, to include more in-depth and technical analyses of economic systems. Applications of the
model include, but are not limited to, forecasting and planning scenarios, economic and policy impact
analysis, feasibility studies, and sensitivity analyses. Each of these analyses requires a mathematical
manipulation of the transactions table. Commonly, input-output models are used as an alternative to
simple economic base and Keynesian models to measure the impacts of multiplier effects within an
economic system. With this application, input coefficients that are derived by dividing the purchases in
an industry into proportions of total purchases are mathematically altered to represent direct and
indirect industry multipliers. The input coefficients can be manipulated to reflect industry-to-industry
multipliers in terms of employment, income, and industrial output. For example, in what way does an
increase in demand by Industry Y for a good produced by Industry X affect the output of Industry X?
However, it should be noted that there are many methods that can be used to calculate economic
multipliers from the input-output table.
 Regardless of the analytical purpose of input-output models, modeling of an economic system can be
undertaken at various scales of geographical inquiry, such as national, regional, state, and
metropolitan. In some instances, firm-to-firm inter-dependencies have been established. Additionally,
analyses have compared interindustry relationships across scales so that national, regional, state, and
metropolitan economies are compared with other economies at similar geographical scales. To that
end, input-output models have been used to help make economic policy decisions.

Todd Sink

Further Readings

Hewings, J. (1985). Regional input-output analysis. Beverly Hills, CA: Sage.

Leontief, W. Quantitative input-output relations in the economic system of the United States. Review
of Economic Statistics vol. 18 pp. 105–125. (1936).

Miernyk, W. (1965). The elements of input-output analysis. New York: Random House.

Miller, R. , & Blair, P. (1985). Input-output analysis: Foundations and extensions. Englewood Cliffs,
NJ: Prentice Hall.

Entry Citation:

Sink, Todd. "Input-Output Models." Encyclopedia of Geography. 2010. SAGE Publications. 24 Nov.
2010. <http://www.sage-ereference.com/geography/Article_n640.html>.

© SAGE Publications, Inc.

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