What does “input-output analysis” mean?

The input-output type of macroeconomic analysis looks at how different economic sectors or businesses affect each other. This method is often used to determine how significant the effects of good or bad economic shocks will be and how they spread through an economy. Wassily Leontief (1906–1999) developed an I-O economic analysis. He won the Nobel Memorial Prize in Economic Sciences for his work.

How to Understand Input-Output Analysis

Input-output tables are the building blocks of I-O research. These tables have rows and numbers in columns showing the supply line for every part of an economy. A list of industries is at the top of each row and column. The information in each column shows how many inputs were used in the production function of that business.

One column, “Auto Manufacturing,” lists the materials needed to make cars, such as steel, metal, plastic, electronics, etc. I-O models usually have different tables that show how much work is needed for every dollar invested or made.

Neoclassical economics and policy advisors in the West don’t often use input-output analysis. Still, Marxist economists have used it to look at coordinated economies that depend on a central manager.

Three Kinds of Effects on the Economy

I-O models try to determine three kinds of effects: direct, indirect, and caused. These terms are another way of talking about the first, second, and third economic effects when the amount of input changes. With I-O models, economists can determine how much output changes across industries when inputs change in one or more industries.

A direct effect of an economic shock is a change in spending at the start. For example, you would need to buy cement, steel, construction tools, workers, and other things to build a bridge.

The producers of the inputs would have to hire more workers to meet the demand, which would have an indirect or secondary effect.

Workers at providers would buy more goods and services for their use, which would have a third, or induced, effect. You can also do this research backward to see what input changes were most likely the cause of output changes.

What Input-Output Analysis Looks Like

That’s how I-O analysis works in this case. The city or town needs to explain why it needs to spend so much money on a new bridge. To do this, it pays an economist to do an I-O study.

They talk to engineers and construction companies to understand how much the bridge will cost, what materials will be needed, and how many people the construction company will hire.

The economist turns this information into dollars and then runs the numbers through an I-O model to get the three levels of effects. The direct effect is just the numbers that were put into the model in the first place, like the value of the raw materials (cement, steel, etc.).

The jobs made by the companies that serve them, like cement and steel companies, have an indirect effect. For the job to get done, these businesses need to hire people. Either they have the money to do it or they need to borrow it, which would take money away from banks.

People who get new jobs spend money on things for themselves and their families. This is called the induced effect. This includes essential things like food and clothes, but now that they have more money to spend, it includes fun things and services.

The I-O research examines how the local government’s plan to build a new bridge will affect different parts of the economy. The government may have to pay for some parts of the bridge with taxes, but the I-O analysis will show how the project helps the economy grow by bringing in businesses that hire people who spend money.

Conclusion

• Input-output analysis is a type of macroeconomic analysis that looks at how different economic sectors or businesses affect each other.
• With input-output analysis, you can guess how significant the effects of good or bad economic changes will be and see how they spread through the economy.
• In the West and conventional economics, input-output analysis is not often used. However, it is often used in Marxist economics when an economy needs to be planned centrally.
• Input-output tables are the building blocks of input-output analysis. They show the supply line for all of an economy’s sectors through rows and columns of data.
• The analysis of inputs and outputs models three different types of effects. There is a direct impact, an indirect impact, and an induced effect.
• When these amounts of input are changed, these effects on the economy happen.