Input-output models describe economic relationships and can be used for forecasting and analyzing effects of changes. Wassily Leontief developed the model and received a Nobel Prize. The models can analyze individual companies and related concepts include economic base analysis and shift-shift analysis.
An input-output model is a way of describing the economic relationships between suppliers and producers in an economy. These models can be used for a variety of purposes, including forecasting an industry’s profitability and analyzing the effects of changes in the economy. National and regional governments have used input-output models to determine where to allocate government funds and increase efficiency by determining which industries have the greatest economic effect.
The input-output model was evolved into a usable form by Wassily Leontief, a Russian-born economist. He developed a way to convert large amounts of raw economic data collected by companies and governments into matrices for ease of study. These matrices could then be manipulated to examine the possible outcomes of price changes, material shortages, and other changes in the economy. Leontief received the Nobel Prize in economics for this achievement.
Input-output models are usually applied to large-scale economic systems, but they can also be used to analyze individual companies. A closed input-output model consists of a system that receives no external inputs and all system outputs are consumed within the system itself. Such systems exist, but they are rare. More common is the open input-output model, which consists of a system consuming a portion of its own output and sending the remainder to some external entity. For example, an oil company may sell most of its gross production to other companies and retain the remainder for its own use.
Several academic concepts are related to input and output models. Economic base analysis studies local economies in relation to their exports by looking at employment numbers. It is based on the premise that a local economy consists of an export-based component and a component that supports the production of those exports. Increasing the number of exports would make the supporting local economy grow. The resulting information is used to determine which export industries would provide the most local economic growth.
Another related concept is the exchange-for-sharing analysis. Shift-shift analysis seeks to understand fluctuations in the employment rates of local economies in relation to the overall national economy and the national state of specific industries. Factoring in the effect of national economic influences provides a clearer picture of the local economy. This allows local government to determine how to invest resources in ways that strengthen the local economy, rather than trying to influence factors that research indicates they cannot control.
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