Notes-Chapter 5-Part 2-IO Analysis

Notes-Chapter 5-Part 2-IO Analysis - LeontiefInputOutput...

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    Leontief Input-Output  Models   From Chapter 5 Alpha Chiang, Fundamental Methods of Mathematical Economics, 4 th Edition
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Background Professor Wassily Leontief, a Nobel Prize winner,* deals with this particular question: "What level of output should each of the n industries in an economy produce, in order that it will just be sufficient to satisfy the total demand for that product?"
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Background The rationale for the term input-output analysis: The output of any industry (say, the steel industry) is needed as an input in many other industries, or even for that industry itself; therefore the "correct" (i.e., shortage-free as well as surplus-free) level of steel output will depend on the input requirements of all the n industries. In turn, the output of many other industries will enter into the steel industry as inputs, and consequently the "correct' levels of the other products will in turn depend partly upon the input requirements of the steel industry.
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Background In view of this interindustry dependence, any set of "correct” output levels for the n industries must be one that is consistent with all the input requirements in the economy, so that no bottlenecks will arise anywhere. In this light, it is clear that input-output analysis should be of great use in production planning, such as in planning for the economic development of a country or for a program of national defense.
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Background Strictly speaking, input-output analysis is not a form of the general equilibrium analysis. Although the interdependence of the various industries is emphasized, the "correct" output levels envisaged are those which satisfy technical input-output relationships rather than market equilibrium conditions. Nevertheless, the problem posed in input-output analysis also boils down to one of solving a system of simultaneous equations, and matrix algebra can again be of service.
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Structure of an Input-Output Model Since an input-output model normally encompasses a large number of industries, its framework is quite complicated. To simplify the problem, the following assumptions
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Notes-Chapter 5-Part 2-IO Analysis - LeontiefInputOutput...

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