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Lecture13

# Lecture13 - ECON 301 LECTURE#13 Liontief Input Output...

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1 ECON 301 – LECTURE #13 Liontief Input – Output Models Recall that throughout the course we have discussed the perfect compliments production function. This functional form is often referred to as a fixed coefficients or fixed proportions function and was named after Professor Wassily Liontief and his seminal work from the early 1950s. In its “static” version, Liontief’s input – output 1 analysis deals with the following question: What level of output should each of the n industries in an economy produce such that that output will be just enough to satisfy the total demand for that product? The reason for the term input – output analysis now becomes quite clear. The output of any given industry (let’s say the steel industry) is needed as an input in many other industries, or even as an input into its own industry; thus the correct level of steel output (i.e. shortage-free and surplus-free) will depend on the input requirements of all of the n industries in the economy. In turn, the output of many other industries will enter into the steel industry as inputs, and consequently the “correct levels of these other products will depend partly upon the input requirements of the steel industry. In light of this inter-industry dependence, any set of “correct” output levels for the n industries must be one that is consistent with all of the input requirements in the economy (so that no bottlenecks will arise anywhere). So it becomes abundantly clear that this input – output analysis should be of paramount use in production planning applications, such as planning for the economic development of a nation or even for a domestic defense program. CAVEAT: Strictly speaking, input – output analysis is not really a form of general equilibrium analysis. Although the interdependence of the various industries is emphasized, the “correct” output levels are those which satisfy a set of technical input – output relationships rather than a set of market equilibrium conditions. Nevertheless, the problem posed by the input – output analysis does boil down to solving a system of simultaneous equations and this gives us a chance to investigate the interdependence among markets using matrix algebra. 1 Liontief, Wassily W. The Structure of American Economy 1919-1939, 2d ed., Oxford University Press, Fair Lawn, N.J., 1951.

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2 The Structure of an Input – Output Model Since an input – output model normally considers a large number of industries, its framework is by necessity rather involved. To simplify the problem, we will make the following standard assumptions: 1. Each industry produces only one homogeneous good (broadly interpreted, this implies that they could produce two or more jointly produced goods provided that they are made in fixed proportions to one another).
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Lecture13 - ECON 301 LECTURE#13 Liontief Input Output...

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