SBP3173 Input & Output

14 August 2008
SBP 3173
Land use planning II
Lecture: Input-Output Analysis
1. Input-output analysis
What is input-output analysis?
As the name implies, input-output analysis is considered with the inputs and
outputs of each industry within a particular study area and their interrelationships.
The outputs of any industry can either be consumed (final purchasers) or be used
as industrial inputs in further productive activity (intermediate purchasers). The
input-output method traces the flow of these outputs of goods and services
(measured in either physical or monetary terms) from one sector of the economy to
another.
The three input-output matrices
The analysis begins by separating the economy into producers (inputs) and
consumers (outputs) and then focuses on the extent to which these are engaged
in final or intermediate transactions. The input-output method employs three
matrices. The transactions matrix describes the flow of goods and services
between buyers and sellers. These flows are usually measured in terms of money
and viewed as sales transactions. There are then two technology matrices which
summarize the economys detail conditions. The first, an input-coefficient
matrix, is derived from the above transactions matrix and shows the inputs
required from suppliers by each immediate purchaser per unit of output. This is
sometimes known as the direct-requirements table and can be used to derive the
second of our technology matrices, i.e. the total-requirements table, which
shows the total inputs/outputs that
Table 1 Transactions matrix (example)
are required per unit of final
demand (final purchasers).
(1) The transactions matrix
Lets
begin
with
a
simple
example (Table 1). Consider a
simple economy which consists
of just two sectors, commercial
and manufacturing. Furthermore,
there is only one final purchaser, such as households, and also one primary
supplier, such as labour. Finally, this hypothetical economy does not trade with
1
the outside world so there are no imports and exports, i.e. closed economy.
In Table 1, assuming that all transactions are measured in monetary terms, the
first row of data shows that manufacturings total sales were RM 300K. Suppose
that now the only product of this manufacturing sector is PC. Of this RM 300K, the
manufacturing sector sold PCs of RM 150K to itself for further processing - PCs
are needed to produce the next PCs. PCs of RM 50K were sold to the commercial
sector for further processing. On top of that, PCs of RM 100K were sold to
households (final purchasers) for final consumption (final demand).
Similarly, when we take a look at outputs (column direction), the first column
shows that in order to produce PCs of RM 300K as total output (total
purchases), manufacturing sector had to supply PCs of RM 150K from itself.
Some services, e.g. sales activities, of RM 100K were needed from the
commercial sector. On top of that, some input, e.g. labour, of RM 50K were
needed from the primary suppliers.
In the same way the commercial rows and columns can be analyzed. It should be
noted that for any intermediate industry, total inputs equal total outputs and,
for the economy as a whole,
Table 2 Input-coefficient matrix (example)
total purchases equal total
sales. Hence, the south-east
corner of the matrix indicates the
grand total inputs as well as the
grand total outputs.
(2) The
matrix
input-coefficient
The input-coefficient matrix

describes the structure of the economy. The idea is to transform the basic
data in the transactions matrix into generalized ones so as to measure the direct
input requirements per unit of output for each intermediate industry. These
coefficients are obtained by dividing the input figures in each intermediate
purchaser column by the number at the bottom of the column, i.e. total inputs for
that industry. Since total inputs equal total outputs, dividing each intermediate
purchasers column by the total will provide a distribution of inputs per unit of
output for each intermediate supplier.
As before, the procedure is best illustrated with a numerical example. As
indicated in Table 2, the outputs needed from each sector were divided by the
total. This shows the distribution of required outputs from each sector for
producing one output in each sector. For example, Table 2 shows that if the
expected final demand for manufacturing is RM 1,000K, then satisfying this
demand will require direct outputs to manufacturing of RM 500K from
manufacturing sector (i.e. 1,000 x 0.5). Similarly, RM 330K of commercial
2
products (i.e. 1,000 x 0.33) and RM 170K of primary outputs (i.e. 1,000 x 0.17),
e.g. labour, are required.
(3) The total-requirements matrix
The above input-coefficient matrix
Table 4 Input-coefficient matrix (general)
Table 3 Transactions matrix (general)
can be used to obtain a totalrequirements matrix. By using

the obtained total-requirements
matrix, we can estimate the total
purchases (total inputs) per unit
of output sold to final purchasers
(final demand). In other words,
we can estimate how much
inputs or outputs are required
when the amount of final demand is known.
Matrix A =
a11 a12
a21 a22
Now the transactions matrix is expressed using general notation

as indicated in Table 3. As did before, this table can be transformed into the
input-coefficient matrix as indicated in Table 4.
Here, when the matrix of intermediate purchases and suppliers is assumed to be

matrix A, the matrix A can be expressed by the following equations.
a11 = X11/Y1
a21 = X21/Y1
Therefore,
X11 = a11Y1
X21 = a21Y2
a12 = X12/Y2
a22 = X22/Y2
X12 = a12Y2
X22 = a22Y2
As indicated in Table 3, X11 + X12 + F1 = Y1 and X21 + X22 + F2 = Y2
Therefore,
a11Y1 + a12Y2 + F1 = Y1
a21Y1 + a22Y2 + F2 = Y2
The above equations can be
transformed into the following
equation using matrix.
a11 a12
Y1
F1
a21 a22
Y2
F2
Table 5 Transactions matrix for regional

economy
Y1
Y2
Therefore,
Y = A Y + F or F = Y A
Y or Y = (I A)-1 F
= (I - A) Y
By using one of the above formulas,
The total inputs/outputs (Y) can be
estimated by the final demand (F). Or
the final demand (F) can be predicted
by the total inputs/outputs.
Exercise 1
Table 5 shows the transaction table for
a regional economy. You are required to
assess the structure of this economy
through
the
input-output
analysis
method. Obtain both the input-coefficient matrix and total requirements matrix,
and assess the impact of a change of final demand to the five economic sectors.
Step by step answer using Excel
Step 1: Check the transactions matrix
- Check whether the total sales for each sector are the same as the
corresponding total purchases.
+
Step 2: Create the input-coefficient

matrix
- Divide
inputs
from
respective
suppliers by the total purchases.
=D25-D16
Step 3: Calculate (I - A)
- Prepare the identity matrix. Since
we have five sectors in this case,
we need to prepare identity matrix
of 5 by 5.
- Then, calculate matrix I (identity
matrix) minus matrix A (input
coefficient in table above).
Step 4: Calculate I Ainverse

- Firstly, select the area of 5 by 5
matrix where you want to obtain
the answer.
- Secondly, find the MINVERSE
function in the Paste Function
button on the toolbar.
- Select the array of (I A) and press
not only Enter but also Ctrl and
Shift at the same time. Then we
can find the answer in the box.
Press
Shift +
Enter
Ctrl
Press
Shift +
Enter
Ctrl
=D5/D$11
Step 5: Assess the total inputs/outputs

- Before we assess the impact of a change of final demand to the total output,
lets input the current final demand and calculate the total output using
formulated equation.
5
We can also find MMULT function in the Paste Function button. In this case,
we also need to press Shift + Ctrl + Enter instead of pressing OK at
the end.
Step 6: Assess the impact of a change to the sectors

-
The
total requirements matrix can be formulated as follows. By using this matrix,

we can predict the required total inputs/outputs with final demand.
We can also assess the impact of change in the final demand of a sector to
the five economic sectors. For example, when we input 100 into the third
row of the final demand matrix, you will obtain the following results. This
indicates that in order to meet the final demand of RM 100K in sector 3,
inputs from other sectors are also needed as shown below.
Limitations of input-output analysis

1.
2.
One of the important limitations is the assumption of the stability of the

technological coefficients. In reality, these are known to vary with time and,
as a generalization.
A second important limitation is that this technique is essentially linear
expressions which assume that the effect of undertaking several types of
production is the sum of the separate parts.

6
3.
A third problem arises with prices since actual sales data is often either
incomplete or, sometimes, not available.

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14 August 2008

Lecture: Input-Output Analysis

The input-coefficient matrix

Table 3 Transactions matrix (general)

can be used to obtain a totalrequirements matrix. By using

Now the transactions matrix is expressed using general notation

Here, when the matrix of intermediate purchases and suppliers is assumed to be

As indicated in Table 3, X11 + X12 + F1 = Y1 and X21 + X22 + F2 = Y2

Table 5 Transactions matrix for regional

Step 2: Create the input-coefficient

Step 4: Calculate I Ainverse

Step 5: Assess the total inputs/outputs

Step 6: Assess the impact of a change to the sectors

total requirements matrix can be formulated as follows. By using this matrix,

Limitations of input-output analysis

One of the important limitations is the assumption of the stability of the

production is the sum of the separate parts.

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