Output Depends On Input /Input Output Analysis

Input-output analysis is an economic tool which enables indications of the relations that exist between various sectors of an economy. This was created by economist Wassily Leontief in the 1930s and includes the creation of an IO table showing the actual inputs of one industry that is used by another. This approach assist in explaining the impacts of change in one sector or the economy on the other sectors.

An input-output table is often of the form of a matrix in which the rows represent the product of industries and the columns are inputs.

Every entry in this matrix shows how much of a particular product or service is consumed by a given sector in creating its output. For example, in the chain of production, steel provided to automotive industry is in turn used by construction industry of cars. Input output analysis, by studying these connections enlightens the details of production and circulation of products and services in economy.

Assessment of the uses of input-output analysis finds that probably the most crucial use is in the formulation of economic planning and policies. It can be further of relevance to governments and economists to predict the impacts of subsidization or taxation to the several economic sectors. For instance, if a government levies an ecological tax on carbon emissions, this type of analysis will identify that some industries will be significantly affected because of their connections with high emitting industries such as the fossil fuel industries.

The second major application of input-output analysis is environmental accounting. When impacts of some environmental type can be linked to certain economic activities, it is feasible to determine the ecological charge or load of various sectors.

This is important for the development of sound economic policies and minimisation of the adverse impact on the physical environment.

However, there are some weaknesses associated with I–O analysis. First, it prescribes constant returns to scale and fixed input proportions, which would not account for technological change or anything related to economies of scale that are must exist in large firms. It also often uses out of date data, as performing the calculations needed for the tables can be labor intensive.

Finally, the input-output analysis has been shown to be a useful method for analyzing the system of economic relations when developing policies.