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Unformatted text preview: ments 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. 2 Liontief, Wassily W. The Structure of American Economy 1919-1939, 2d ed., Oxford University Press, Fair Lawn, N.J., 1951. 220 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). 2. Each industry uses a fixed input ratio or factor combination for the production of its output. 3. Production in every industry is subject to constant returns to scale so that a k-fold change in every input will result in a k-fold change in the output. Of course, these assumptions are quite unrealistic. Even so, we can remedy at least some of these issues conceptually. For example, even if an industry does produce two different goods or uses two different possible factor combinations in production we can (at least conceptually) break the industry down into two separate industries. From the above assumptions we see that, in order to produce each unit of the jth commodity, the input need for the ith commodity must be a fixed amount that we will denote as ai...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.
- Spring '10