Input Output Analysis

Input Output Analysis

Input-output Analysis, the method used by theoretical and applied economists to take account of factors relating to the general balance of the economic system in a factual analysis of the problems of production.

There are three central elements in this method. First, it deals exclusively with problems of production; the theory of demand plays no part in the hard core of input-output analysis. The problems analysed are essentially technical problems of production. The inquiry seeks to determine what can be produced and the quantity of the 'intermediate' product that will be used up in the production-process given the quantities of available resources and the state of technology. It is therefore not strictly economic' analysis, which i& concerned essentially with changing values.

Secondly, the analysis is closely linked with factual inquiry. A consequence of this concern with facts is that compromises have been forced on the investigator; input-output analysis employs a. model which is more severely simplified and restricted in its treatment of phenomena than many economic theories. Its restriction lies. in the exclusive emphasis on the production side of the economy (the simplifications are outlined below).

The third characteristic is the concentration on an economic state, which is in balance or equilibrium. Input-output analysis fries to take account of the links between the production plans and activities. of the many industries that make up the economy. Each industry employs the outputs of other industries as its raw materials. Its own output, in turn, is often used by other industries as a productive factor. For example, steel is used to make rail wagons which are in. turn used to transport steel and the coal and pig-iron used in its manufacture.

Of the simplifying assumptions forced on input-output analysis which are more extreme than those usually employed in theoretical economic models, the two most important are, first, that each industry produces one single output, i.e. no two goods are produced jointly by one industry, and secondly, that all productive factors are employed in a fixed relation to one another.

The basic problem of input-output analysis is to consider what net-outputs can be left over from the process of production for final consumption and how much of each output will be used up in the course of the productive activities undertaken to yield these net outputs.

A successful solution to these problems would result in many practical applications. For example, input-output analysis could be used in predicting future production requirements if acceptable estimates of demand could be obtained. Some economists believe it could be used for national economic planning. For a more modest objective it has begun to be used to provide a detailed structure of national income accounting. If the problems cannot be solved, in particular if it is difficult to make realistic forecasts of demand, input-output analysis may remain a useful theoretical tool with little practical application.

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