|An analytical framework developed by the economist Wassily Leontieff to describe and model the inter-industry linkages within the economy, and to use this information to examine economic and policy impacts. The basic building block is recognition that the production (or outputs) of one sector become the inputs for other sectors. Thus the machine-tools sector uses inputs of energy, steel, metals and other components (all in turn outputs of other sectors) to produce outputs to other industries, such as car and aircraft producers.
Information on inter-industry inputs and outputs is collected by survey or from administrative records, and recorded in an input-output table. The rows and columns represent the different industries or sectors, and the entries or coefficients measure the exchanges between them. Leontieff\'s innovation was to see that this table could be manipulated as a matrix, and used mathematically. If the final demands of consumers are specified, the input-output matrix can be analysed as a set of simultaneous equations to trace out all the backward linkages involved in producing for those final demands, calculating what each sector must produce. By changing the final demands, we can assess the impact of different policies and economic changes. The model (in its basic form at least) is a comparative equilibrium model: it measures the medium-or longterm adjustments, but does not track the short-run path.
Very detailed input-output models have been constructed for most advanced economies, and the method has been extended to regional and multiregional analyses: examining linkages with a region (e.g. the Philadelphia region) and their dependence on the national economy, and explicitly tracing exchanges between sectors in different regions, using information on commodity flows and transport charges. Full multiregional models have been built for countries such as Japan and the Netherlands, and (with some simplifying adjustments) for the 51 states of the USA. One application of this USA model has been to examine the sectoral and regional impacts of alternative tax policies: tax changes shift the final consumer demands, and the multiregional input-output model computes the effects on industrial production across the regions. Such detailed models are very demanding of data, and so are difficult and expensive to construct. A limitation is that one then has to assume that the coefficients remain stable (or project technical changes by some method).
Recent attention has focused on using the framework to trace the energy use and other activities such as environmental pollution associated with production. Pollution generation can be included as an output, and the costs of pollution abatement or control can be included as an input. Dutch economists have included this in a multiregional framework, so that pollution emissions (to air, river and sea) diffuse into neighbouring regions.Â (LWH)
Suggested Reading Miller, R.E. and Blair, P.D. 1985: Input-output analysis: foundations and extensions. Englewood Cliffs, NJ: Prentice-Hall.