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Input-Output Analysis Definition
Input-output analysis (“I-O”) is a method of analysis in macroeconomics that observes the interdependencies between various sectors and industries in an economy. This form of macroeconomic analysis provides a breakdown of each sector and industry with respect to their impacts on the economy.
Input-output analysis is of great importance to national income economists because it helps in analyzing economic shocks as influenced by different sectors and industries and their ripple effects on the general economy.
Wassily W. Leontief, a Russian-born U.S. economist developed the Input-output analysis (“I-O”) in the 20th-century. This macroeconomic analysis method evaluates the interdependencies between various sectors of an economy by regarding the product of each sector or industry is a commodity and factor of production.
I-O analysis uses input-output tables to represent the supply chain of different sectors of an economy. The table contains rows and columns that accommodate data input which can be used to gauge the interdependencies of various sectors and industries in an economy. The inputs used in the production of the commodity in industry and the amount of output the industry produces are represented on the table.
A Little More on What is Input-Output Analysis
Three Types of Economic Impact
The Input-output analysis observes the impacts of economic shocks (whether positive or negative), at different levels. The levels of impact observed are; when changes occur to the input level in an economy,
- The direct or primary impact
- Indirect or secondary impact
- Induced or tertiary impact
The impacts are seen throughout the economy. Through I-O analysis, economists study the impact of input changes in a particular sector of an economy and how it affects the entire economy.
I-O analysis can be conducted by economists and analysts in any given sector or industry in an economy. For example, a local government or a municipal wants to construct a bridge for its region. This project requires much capital, both human and resource capital. If an economist is to conduct an I-O analysis on the cost of the projects and the ripple impacts changes in input can cause, the following factors will be considered;
- The cost of constructing the bridge.
- The number of supplies needed.
- The number of laborers and contractors needed to be hired.
The economist will calculate the above in dollar amounts and use the I-O model to determine the direct, indirect and induced impacts that are likely to occur as a result of the project.