Input-Output Analysis

Lecture Slides for ECON468

Louis Boakye-Yiadom
Introduction to Input-Output Analysis
▪ The reality of inter-sectoral linkages
▪ The importance of inter-sectoral linkages
▪ I-O analysis is an economic planning technique
that utilizes interlinkages between sectors to
determine or forecast required input and
output requirements of different sectors of an
economy within an internally consistent
framework.

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Stages/Steps in Input-Output Analysis
i. The construction of the input-output table
ii. The derivation of the input-output
coefficients (input or technical coefficients)
iii. The inversion of the Leontief matrix to obtain
a general solution.

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 Basic Features of an I-O Table
Intermediate Use Final Use Total Use

Final demand for

XXXX
Inter-sectoral goods and
Processing transactions services produced
(including
exports)

Payments by The direct sales of

industries to the factors of
owners of factors of production and
production and to imports to final
Payments
foreigners for the users.
purchase of
imports.

Total Output XXXX XXXX

 The Input-Output Table
▪ An I-O table consists of rows and columns.
▪ The rows can be categorized broadly into
processing and payments segments.
▪ The columns can be categorized broadly into
intermediate users and final users/demand
segments.
▪ In the processing half, each row shows the
allocation of output according to how it is used.
▪ In the “intermediate users” segment, each
column shows the costs of producing the sector’s
output.
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 Purchases Intermediate Final demand
by users
Consumption Investment Exports Total
(I) (E) demand
Sales Industries
by Private Gov’t
(C) (G)
1 2 3 j…n
1 X1C X1G X1I X1E X1
2
Processing X2c X2G X2I X2E X2
3
Xij X3C X3G X3I X3E X3
i
XiC XiG XiI XiE Xi
n
XnC XnG XnI XnE Xn

Wages Wj WC WG W
Rent Rj RC RG R
Payments

Interest Dj DC DG D
Profits Pj PC PG P
Imports Mj MC MG MI M

Total supply Xj C G I E
 The I-O Table (II)
▪ Regarding “processing-intermediate users”
submatrix, an entry can be represented by Xij,
Where:
X represents the value of the output or input
i represents the origin of the good/service
j represents the destination of the good/service
Thus,
Xij denotes an allocation by sector i to sector j, or
inputs obtained by sector j from sector i.

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 The I-O Table (III)
▪ In the processing half, the sum of each row’s
values is the total demand for that sector’s
output.
▪ In the “intermediate users” segment, the sum of
each column’s values is the value of total output
of the respective sector.
➢ That is, the sum of the value of inputs (in the
processing half) plus the sum of the value-added
(in the payments half) plus the value of imported
inputs.
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 Input-Output Coefficients
▪ Input-output coefficients are numbers that
provide information on a sector’s input
requirements.
▪ They are derived from the inter-sector section of
the I-O table by dividing each entry by the sum of
the column entries.
▪ If Xij denotes the amount of sector i’s output that
is used as input by sector j, and Xj is the total
value of sector j’s output, then an input
coefficient is defined as:
aij = Xij/Xj (1)
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 Input-Output Coefficients (II)
▪ aij represents the amount of purchases from
sector i required to produce GHS1 of sector j’s
output.
▪ The matrix of aij (i=1,…,n; j=1,…,n) is known as the
A-matrix.
▪ The A-matrix can be interpreted as a set of
production functions for each sector j.
▪ These fixed-coefficient production functions are
often described as Leontief production functions.
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 Input-Output Coefficients (III)
▪ From equation 1,
Xij = aijXj (2)
▪ Given that in the processing half, the sum of each row’s
values is the total demand (Xi) for that sector’s output, it
can be shown that:
𝑛

𝑋𝑖 = 𝐹𝑖 + ෍ 𝑎𝑖𝑗𝑋𝑗
𝑗=1
Where Fi is the portion of Xi that constitutes final demand,
i = 1,…,n.
(Let’s label the above as equation 3)
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 Obtaining a General Solution
▪ Given the interdependence among sectors, what
levels of output must each of the n sectors
produce in order that they will just be enough to
meet the total demands for the products?
▪ With the aid of matrix algebra, equation 3 can be
used to solve the above and related problems.
▪ Examine equation 3 for a two-sector scenario.
▪ Examine equation 3 for a three-sector scenario.

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 Obtaining a General Solution (2)
▪ (I – A) X = F
Where:
i) I is an nxn identity matrix (an identity matrix of
order n);
ii) A is an nxn matrix of input-output coefficients;
iii) X is an nx1 matrix of the outputs of the different
sectors; and
iv) F is an nx1 matrix of final demands for the
products of each sector.
Note: the matrix I-A is often referred to as the Leontief
matrix.
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 Obtaining a General Solution (3)
▪ To solve for X,
(I – A)-1(I – A) X = (I – A)-1F
Thus, X = (I – A)-1F
X = BF, where B = (I – A) -1

Let the elements in the matrix B be

denoted by bij.
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 Obtaining a General Solution (4)
𝑛

𝑋𝑖 = ෍ 𝑏𝑖𝑗𝐹𝑗
𝑗=1
(i = 1, … , n)
Thus, for an n-sector scenario,
X1 = b11F1 + … + b1nFn
Xn = bn1F1 + … + bnnFn

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 Backward and Forward Linkages
▪ Backward linkages
These are linkages resulting from the sources of
a sector’s inputs.
▪ Forward linkages
These are linkages resulting from the
destinations of a sector’s outputs.

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Backward and Forward Linkages (2)
▪ The backward linkages of any jth sector can be
measured by the following index:
LBj = W/V, where:
𝑛

𝑊 = ෍ 𝑋𝑖𝑗
𝑖=1
and V = Xj
Note that the above index of backward linkages
equals the sum of input coefficients for sector j
(i =1, … ,n).

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Backward and Forward Linkages (3)
▪ The forward linkages of any ith sector can be
measured by the following index:
LFi = H/R, where:
𝑛

𝐻 = ෍ 𝑋𝑖𝑗
𝑗=1

and R = Xi

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Backward and Forward Linkages (4)
▪ Backward and forward linkages provide useful
information on the stimuli that one sector
may give to others.

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Assumptions of Input-Output Analysis
▪ Technical coefficients are fixed.
▪ The total effect of carrying out several
activities is the aggregation of the separate
effects.
▪ Production is subject to constant returns to
scale.

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