Input-output models show economic relationships between suppliers and producers. They’re used for forecasting industry profitability and analyzing the effects of economic changes. Wassily Leontief developed the model and won a Nobel Prize for it. The models can be applied to large-scale and individual systems, and related concepts include economic basis analysis and shift-share analysis.
An input-output model is a way to represent the economic relationships between suppliers and producers in an economy. These models can be used for a variety of purposes, including forecasting the profitability of an industry and analyzing the effects of changes in the economy. Both national and regional governments have used input-output models to determine where to allocate public funds and increase efficiency by determining which sectors have the greatest economic effect.
The input-output model was developed into a usable form by Wassily Leontief, a Russian-born economist. He has developed a way to convert huge amounts of raw economic data collected by companies and governments into matrices for easier study. These matrices could then be manipulated to examine the potential outcomes of price changes, material shortages, and other alterations to the economy. Leontief was awarded the Nobel Prize in Economics for this achievement.
Input-output models are usually applied to large-scale economic systems but can also be used to analyze individual companies. A closed input-output model consists of a system that receives no external inputs and all outputs of the system are consumed within the system itself. Such systems exist but are rare. More common is the open input-output model, which consists of a system consuming some of its output and sending the rest to some external entity. For example, an oil company may sell most of its gross production to other companies and keep the rest for its own use.
Many academic concepts are related to input-output models. Economic basis analysis studies local economies in relation to their exports by analyzing employment data. It is based on the assumption 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 greatest local economic growth.
Another related concept is shift-share analysis. Shared shift analysis aims to understand the fluctuations in employment rates of local economies in relation to the overall national economy and the national state of specific industries. Factoring 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 a way that will build the local economy, instead of trying to influence factors that research indicates they cannot control.
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