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Chapter 6 - Analyze Leontief's Input-Output Analysis

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15 views2 pages

Chapter 6 - Analyze Leontief's Input-Output Analysis

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Lê Huyền
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© © All Rights Reserved
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Input-Output Analysis

Prof.Wassily W Leontief introduced input-output analysis technique in 1951.


Input means that objects or a material, which is demanded by the entrepreneur or
producer for the purpose of production and output, is the result or outcome of the
productive effort. Thus input is that object which is purchased with a view to use it in an
enterprise where as the output is things made and sold by the entrepreneur. Thus the
input is the expenditure of the firm and out put is its income.

In short input-output analysis is a technique for analyzing inter industry relations


and interdependence in the entire economy because input on one industry is the output of
other. The major share of the economic activity is involved in the production of
intermediate goods or inputs, goods that are output for one industry but are again
employed as input for further production by another industry. In this way it is a cyclical
process following incessantly among many industries. In short it can be said that in an
input-output analysis, in a state of perfect equilibrium, the monetary value of the total
output of an economy must be equal to the monetary value of all the inputs and outputs of
all the industry taken together.

The important conceptual equation:


production = internal demand + external demand

Main Features of the Input-output Analysis

Main features of the input-output analysis are

1. The analysis applies to an economy that is in equilibrium and economy with


partial equilibrium falls outside its sphere.
2. This technique bears no relationship with demand analysis because its sole
function is to analyse and consider the technical problems of the production.
3. This analysis is based on empirical study.
4. Input output analysis has two parts first, constructing an input-output table and
second making systematic use of the input-output model.

Assumptions

The following assumptions are made by Prof. Leontief before the analysis

1. The economy is in perfect equilibrium


2. the total economy can be divided into two sectors-the inter industry sector and the
final demand sector, each sector can be further sub-divided.
3. Every industry produces only one commodity and no two products are produced
jointly.
4. The total output of any one industry is used as an input by some other industry or
by the final demand sector.
5. Production follows the law of constant returns to scale.
6. The level of the technological progress remains constant in the economic field,
because of which the input coefficients remain constant.
7. There are no external economies and diseconomies of production.

It's worth noting that the model has been widely used in many different contexts, such as in
development studies and in economic analysis. It has also been used in various applications
like understanding the output of a country's oil and gas industry.

In today's date, this model is still used by many researchers on a global scale to discuss
various economic issues. It is an effective way to quantify the interrelationships within
production and consumption patterns, and it can help to identify the strengths and weaknesses
of a particular industry or sector.
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