Input and output analysis
Input-output is a novel technique used to analyze the relationship between industries in order to understand the interdependencies and complexities of the economy and, therefore, the conditions to maintain the balance between supply and demand. It is also known as “cross-industry analysis”.
Before we discuss the input-output method, let’s understand the meaning of the terms “input” and “output”. An input is “something that is bought for the company”, while a product is “something that sells”. An input is obtained but an output is produced. Therefore, the input represents the expenditure of the company and the product its income. The sum of the monetary values of the inputs is the total cost of a company and the sum of the monetary values of the production is its total income.
Input-output analysis tells us that there are industrial interrelations and interdependencies in the economic system as a whole. The inputs of one industry are the outputs of another industry and vice versa, so that ultimately their mutual relationships lead to balance between supply and demand in the economy as a whole Coal is an input for the steel industry and steel is an input for the coal industry. although both are products of their respective industries. An important part of economic activity consists of producing intermediate goods (inputs) for later use in the production of final goods (products). There are flows of goods, in “eddies and countercurrents” between different industries. The supply side consists of large inter-industry flows of intermediate products and the demand side of final goods. In essence, input-output analysis implies that, in equilibrium, the monetary value of aggregate output for the entire economy must equal the sum of the monetary values of interindustrial inputs and the sum of the monetary values of inputs. interindustrial. industry products.
Input-output analysis is the best variant of general equilibrium. As such, it has three main elements: First, the input-output analysis focuses on an economy that is in equilibrium. It is not applicable to partial equilibrium analysis. Second, it does not deal with demand analysis. It deals exclusively with technical production problems. Finally, it is based on empirical research.
This analysis is based on the following assumptions:
(i) The economy as a whole is divided into two sectors: “intersectoral sector” and “final demand sector”, both with the capacity for subsector division.
(ii) The total production of any interindustrial sector can generally be used as inputs by other interindustrial sectors, by itself and by the final demand sectors.
(iii) No two products are manufactured together. Each industry produces only one homogeneous product.
(iv) Prices, consumer demands and factor supply are given.
(v) There are constant returns to scale.
(vi) There are no external economies and diseconomies of production.
(vii) The combination of inputs is used in rigidly fixed proportions. Inputs are kept in constant proportion to the level of production. It implies that there is no substitution between different materials or technological progress. There are fixed input production coefficients.