BUSINESS MATHEMATICS

Input Output Analysis

Prepared by
Dr. S M Zahirul Islam
Adjunct Faculty, Department of Business Administration
International Islamic University Chittagong
 Input-Output analysis is a technique which was invented by Prof. Wassily W. Leontief.
Input Output analysis is a form of economic analysis based on the interdependencies between
economic sectors. The method is most commonly used for estimating the impacts of positive or
negative economic shocks and analyzing the ripple effects throughout an economy.
The foundation of Input Output analysis involves input – output tables. Such tables
include a series of rows and columns of data that quantify the supply chain for sectors of the
economy. Industries are listed in the heads of each row and each column. The data in each
column corresponds to the level of inputs used in that industry’s production function. For
example the column for auto manufacturing shows the resources required for building
automobiles (i.e, requirement of steel, aluminum, plastic, electronic etc.,). Input Output models
typically includes separate tables showing the amount of labour required per rupee unit of
investment or production.
Consider a simple economic model consisting of two industries A1 and A2 where each
produces only one type of product. Assume that each industry consumes part of its own output
and rest from the other industry for its operation. The industries are thus interdependent.
Further assume that whatever is produced that is consumed. That is the total output of each
industry must be such as to meet its own demand, the demand of the other industry and the
external demand (final demand).
Our aim is to determine the output levels of each of the two industries in order to meet a
change in final demand, based on knowledge of the current outputs of the two industries, of
course under the assumption that the structure of the economy does not change.

Definition of terms used in Input-Output Analysis

1. Intermediate demand: This is the output of an industry that goes to the other
productive industries. It consist of inputs purchased within the sectors for further
production of goods and services
2. Final demand: This is the output of an industry that goes to non-producing sectors. It
represents goods and services which are not renewed within producing sectors eg
Goods used for final consumption, investment, inventory accumulation, exports etc
3. Primary inputs: This is the input of an industry that come from non- producing sectors
labour our, imports, etc
4. Total output: This is the sum of intermediate demand and final demand
5. Total value of input: This is the amount of goods and services used in the production of
other goods and services in the economy.
NB: Total value of inputs=Total value of outputs

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 6. Close input-output model: This is a model in which the entire production is consumed
by only productive industries in the economy. It is a model that satisfies only the
intermediate demand
7. Open Input-output model: This is a model that satisfies both intermediate and final
demand. Production is consumed by those participating in production and other
external parties
8. Transaction table: This is a table that shows the outputs and inputs of sectors or
industries. It shows the inter-industry transactions.
9. Technical coefficients: These are proportions of inputs required by an industry in
order to produce a unit or a shilling worth of output.
10. Technical coefficients matrix: This is a matrix that contains all the technical
coefficients.

Purpose of Input-Output Analysis

1. Help to determine the output level of each industry in order to satisfy both intermediate
demand and final demand.
2. Reveals how various resources in an economy are shared among the contributing
sectors
3. Useful in regional and national planning for economic development.
4. Helps to reveal the effect on the economy if some decisions are made by the
contributing sectors.
5. It is used in computing the gross national product
6. It is used by firms to apportion common services

Assumptions of input-output analysis

1. Each sector in the economy produces a single homogeneous product or a mix of

products
2. Each sector in the Economy is assumed to use a fixed input-output ratio .That is the
technical coefficients are constant
3. The number and composition of the sectors do not change
4. The output of each industry is subject to constant return to scale, which means that if
the output is to double, input must also doubt.
5. The technological matrix does not change

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Input-Output in Mathematics and Economics

In Mathematics, input and output are terms used in a function. We have learned that a
function is a relation that expresses the dependence of one variable on one or more other
variables. The determining variable is termed as the independent variable and the value of the
variable that depends on the independent variable based on a rule expressed by the function, is
termed as the dependent variable.

For example, in a function,

𝑌 = 𝑎 + 𝑏𝑋 − − − − − (1)

Y is the dependent variable and X is the independent variable. In equation (1), a rule is
established that there is a positive relationship between Y and X Y may also be termed as the
Output variable and X may be termed as the Input variable. Since values of both Y and X
changes, they are termed as variables.

In Economics, inputs may be primary input (factors that are used for production) or
intermediate input (output of one industry used as input to produce goods in own or other
industries). Output is the product that has been processed and may be used for two major
purposes:

➢ The output of one industry may be used as the input for other industries
(intermediate inputs)
➢ The output may be used to meet final demand.

For example, a pencil is a final product. Most pencils are made of cedar wood and pencil
lead is made from graphite and clay. Wood, graphite and clay are the raw materials. Pencil is
produced in the pencil factory and this product may be used in the factory to do paper work. It
may be used by other industries or it may go to the households for final consumption.

In the economy at large, there are a large number of products being produced every day
and the output of one industry may be used as input for some other industry or it may be used
as final consumption. The flow of money between industries that is involved during the process
of production is represented in an input-output table.

Input- Output Table

For a layman, the Input-Output table is a tabular representation of the relationship

between the Inputs and the Outputs. Generally the number of observations is entered in rows
and the variables are entered in columns. Equation (1) is a single equation with one dependent

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variable and one independent variable. The rule of the given function is that Y is two times X
plus 5. Now, by putting different values for X we get different values for Y. If numerical values
are assumed for the constant ‘a’ and the co-efficient ‘b’ as 5 and 2 respectively, equation (1)
may be written as
𝑌 = 5 + 2𝑋 − − − − − (2)

The relationship between Y and X may be represented in a tabular in Table 1.

Table 1: Simple Input-Output Table

Observation X (Input) Y (Output)

1 0 5
2 1 7
3 2 9
4 3 11
In Table 1, there are 4 rows and three columns. The rows show the number of
observation and columns show the variables Y and X and the total number of observations.
This may be considered as a simple case with one input and one output. Table 1 is a simple
Input-Output table. This table may be extended to two or more independent variables.
The Input-Output table of an economy is however far more complex. This is explained in
the next section.

Input-Output Table of an Industry

Consider the Automotive Industry. The Automotive Industry is an industry involved in

the manufacturing of motor vehicles, (passenger vehicles and light weight trucks) including
engines and bodies of automobiles. For simplicity, suppose that the automotive industry
produces light truck and engines and at the same time, trucks and engines are also needed in
the manufacturing process for some purpose or the other such as trucks may be needed for
transportation and engines may be needed to run machines. It may also be assumed that there
is no final demand. That is, whatever is produced in the industry is used as intermediate inputs
and not for final demand. The flow of trucks and engines in the automotive industry in a year
may be represented in a tabular form as shown in Table 2.

Table 2: Input-Output Table of Automotive Industry

Factory
Commodity Total
Trucks Engines
Trucks 90 10 100
Engines 150 50 200

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Interpretation:

Table 2 shows that, 90 trucks are needed by the truck factory 10 trucks by the engine
factory. And 150 engines are needed by the truck factory and 50 engines are needed by the
engine factory. Therefore, the total output of trucks and engines should be the sum of all the
intermediate demands. That is,

Total Output of trucks = 90 +10=100

Total Output of engines = 150+50=200

Input-Output Table of an Economy

In an economy there are several industries producing a large number of products. Also,
a part of the total output is used as intermediate inputs and a part is used as final demand. For
simplicity, the economy may be divided into three sectors- primary, secondary and tertiary.
The primary sector includes mining, quarrying, farming, fishing and forestry. The secondary
sector includes heavy manufacturing industries, light manufacturing industries, food
processing, oil refining and energy production. The tertiary sector provides services to
consumers and includes a wide range of businesses such as financial institutions, schools and
restaurants.

If an economist wishes to study the flow of resources or money from one sector to the
other, they may use the input-output table. This table gives a clear view of the structure of the
economy and helps to understand the flow of money in the economy.

Table 3: Input-Output Table of an Economy

Final Gross
Sectors Primary Secondary Tertiary
Demand Output
Primary 30 150 80 340 600
Secondary 100 95 110 395 700
Tertiary 60 100 80 560 800

Interpretation:

Table 3 is an arbitrary example of an economy with three sectors. The numbers in the
cells shows the flow of money from one sector to another sector. The primary sector produces
output worth BDT 600 crore, secondary sector produces output worth BDT 700 crore and
tertiary sector produces output worth BDT 800 crore.

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 The Final Demand may be categorized as Private Final Consumption Expenditure
(PFCE), Government Final Consumption Expenditure (GFCE), Gross Fixed Capital Formation
(GFCF), Change in Stocks (CIS), Exports of goods and services (EXP) and Imports of goods and
services (IMP).

The primary sector spends BDT 30 crore for itself, BDT 150 crore in the secondary
sector, BDT 80 crore in the tertiary sector and BDT 340 crore in final demand.

Similarly, the secondary sector uses BDT 100 crore in the primary sector, BDT 95 crore
for itself, BDT 110 crore in the tertiary sector and BDT 395 crore in final demand.

Finally, the tertiary sector uses BDT 60 crore in the primary sector, BDT 100 crore in
the secondary sector, BDT 80 crore for itself and BDT 560 in final demand.

Generally the output flow is represented in rows, and the columns represent the sectors
to which the output goes as an input. The “row sum” gives an idea about the total amount of
output of one sector that goes as an input to all the other sectors, as well as to itself and final
demand. In other words, “row sum” tells the total supply of each sector to all the sectors.

Closed model and open model

In open model when value of final demand is given, we can find out absolute level of
production. But in a closed model, where value of final demand is not given absolute values
cannot be found

Derivation of the Input-output model

Let aij be the taka value of the output of Ai consumed by Aj , i, j = 1, 2
Let x1 and x2 be the taka value of the current outputs of A1 and A2 respectively.
Let d1 and d2 be the taka value of the final demands for the outputs of A1 and A2 respectively.
The assumptions lead us to frame the two equations
𝑎11 + 𝑎12 + 𝑑1 = 𝑥1 𝑎21 + 𝑎22 + 𝑑2 = 𝑥2 - - - - - - - - - - - (1)
𝑎𝑖𝑗
Let 𝑏𝑖𝑗 = , i, j = 1,2
𝑥𝑗
𝑎11 𝑎12 𝑎21 𝑎22
So, 𝑏11 = ; 𝑏12 = ; 𝑏21 = 𝑎𝑛𝑑 𝑏22 =
𝑥1 𝑥2 𝑥1 𝑥2

The equation (1) take the form

𝑏11 𝑥1 + 𝑏12 𝑥2 + 𝑑1 = 𝑥1 𝑏21 𝑥1 + 𝑏22 𝑥2 + 𝑑2 = 𝑥2
The above equation can be rearranged as
(1 − 𝑏11 )𝑥1 − 𝑏12 𝑥2 = 𝑑1
−𝑏21 𝑥1 + (1 − 𝑏22 )𝑥2 = 𝑑2
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 The matrix form of the above equation is
1 − 𝑏11 −𝑏12 𝑥1 𝑑
( ) (𝑥 ) = ( 1 )
−𝑏21 (1 − 𝑏22 ) 2 𝑑2

1 0 𝑏 𝑏12 𝑥1 𝑑
(( ) − ( 11 )) (𝑥 ) = ( 1 )
0 1 𝑏21 𝑏22 2 𝑑 2

𝑏 𝑏12 𝑥1 𝑑
(𝐼 − 𝐵)𝑋 = 𝐷 where 𝐼 = (1 0) ; 𝐵 = ( 11 ) ; 𝑋 = (𝑥 ) 𝑎𝑛𝑑 𝐷 = ( 1 )
0 1 𝑏21 𝑏22 2 𝑑2
By solving we get, 𝑋 = (𝐼 − 𝐵)−1 𝐷
The matrix I-B is known as the Technology matrix and B is Co-efficient Matrix.
The Hawkins-Simon conditions
Hawkins – Simon conditions ensure the viability of the system.
If I-B is the technology matrix, then Hawkins – Simon conditions are
i. the main diagonal elements in I – B must be positive and
ii. |I – B| must be positive.
Example 1: The co-efficient matrix of an economics system of two industries is
0.8 0.2
( ). Test whether the system is viable as per Hawkins – Simon conditions
0.9 0.7
0.8 0.2 1 0 0.8 0.2 0.2 −0.2
Solution: Here, 𝐵 = ( ) then 𝐼 − 𝐵 = ( )−( )=( )
0.9 0.7 0 1 0.9 0.7 −0.9 0.3
0.2 −0.2
Now, |𝐼 − 𝐵| = | | = (0.2)(0.3) − (−0.2)(−0.9) = 0.06 − 0.18 = −0.12 < 0
−0.9 0.3
Since, |𝐼 − 𝐵| is negative, Hawkins – Simon conditions are not satisfies.
Example 2: The following inter-industry transaction table was construct for an economy of the
year 2023.
Final
Industry 1 2 Total output
consumption
1 500 1600 400 2500
2 1750 1600 4650 8000
Lobours 250 4800

Construct technology co-efficient matrix showing direct requirements. Does a solution

exist for the system?
Solution: Here, 𝑎11 = 500 ; 𝑎12 = 1600; 𝑥1 = 2500
𝑎21 = 1750 ; 𝑎22 = 1600; 𝑥1 = 8000
𝑎11 500 𝑎12 1600
𝑏11 = = = 0.20; 𝑏12 = = = 0.20
𝑥1 2500 𝑥2 8000
𝑎21 1750 𝑎22 1600
𝑏21 = = = 0.70 𝑎𝑛𝑑 𝑏22 = = = 0.20
𝑥1 2500 𝑥2 8000

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 0.2 0.2
The co-efficient matrix is 𝐵 = ( )
0.7 0.2
1 0 0.2 0.2 0.8 −0.2
Now, |𝐼 − 𝐵| = |( )−( )=( )| elemnts of priciple diagonal are positive
0 1 0.7 0.2 −0.7 0.8
= (0.8)(0.8) − (−0.7)(−0.2) = 0.64 − 0.14 = 0.50 > 0
Since, diagonal elements are positive and |𝐼 − 𝐵| is positive, Hawkins – Simon
conditions are satisfied. Hence this system has solution.
Example 3: In an economy there are two industries P1 and P2 and the following table gives
supply and demand posotion in crores of taka.
Production Consumption Sector Final
Gross output
Sector P1 P2 Demand
P1 10 25 15 50
P2 20 30 10 60

Determine the outputs when the final demand change to 35 for P2 and 42 for P2
Solution: Here, 𝑎11 = 10 ; 𝑎12 = 25; 𝑥1 = 50
𝑎21 = 20 ; 𝑎22 = 30; 𝑥1 = 60
𝑎11 10 1 𝑎12 25 5
𝑏11 = = = ; 𝑏12 = = =
𝑥1 50 5 𝑥2 60 12
𝑎21 20 2 𝑎22 30 1
𝑏21 = = = 𝑎𝑛𝑑 𝑏22 = = =
𝑥1 50 5 𝑥2 60 2
1 5

The co-efficient matrix is 𝐵 = (52 12

1)
5 2

1 5 4 5
1 0 − 12
Now, |𝐼 − 𝐵| = |( ) − (52 12
1) =( 2 5
1 )| elemnts of priciple diagonal are positive
0 1 −5
5 2 2

4 1 2 5 2 1 7
= ( ) ( ) − (− ) (− ) = − = >0
5 2 5 12 5 6 30
Since, diagonal elements are positive and |𝐼 − 𝐵| is positive, Hawkins – Simon
conditions are satisfied. Hence the problem has solution.
1 5

Now 𝑎𝑑𝑗(𝐼 − 𝐵) = (22 12

4)
5 5

1 5 1 5
25
1 1 2 12 30 1 15
We have (𝐼 − 𝐵)−1 = 𝑎𝑑𝑗(𝐼 − 𝐵) = ( 7 ) (2 4) = (2 12
4) = 7( 2 )
|𝐼−𝐵| 7 2
30
5 5 5 5
12 24

35
𝑋 = (𝐼 − 𝐵)−1 𝐷 where 𝐷 = ( )
42

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 𝑥1 1 25
35 1 15 × 35 + 25 × 42 150
(𝑥 ) = (15 2 ) (42) = 7 ( 2 )=( )
2 7 204
12 24 12 × 35 + 24 × 42
So 𝑥1 = 150 𝑎𝑛𝑑 𝑥2 = 204
Therefore, the output of industry P1 should be tk 150 cores and P2 should be tk 204
cores.
Example 4: An economy produces only coal and steel. These two commodities serve as
intermediate inputs in each other’s production. 0.4 tonne of steel and 0.7 tonne of coal are
needed to produce a tonne of steel. Similarly 0.1 tonne of steel and 0.6 tonne of coal are
required to produce a tonne of coal. No capital inputs are needed. Do you think that the system
is viable? 2 and 5 labour days are required to produce a tonne s of coal and steel respectively. If
economy needs 100 tonnes of coal and 50 tonnes of steel, calculate the gross output of the two
commodities and the total labour days required.
Solution: The given problem can be writen as followin tabular form
Product Steel Coal Final demand
Steel 0.4 0.1 50
Coal 0.7 0.6 100
Labour days 5 2 -
0.4 0.1
Here the co-efficient matrix is 𝐵 = ( )
0.7 0.6
1 0 0.4 0.1 0.6 −0.1 0.6 −0.1
(𝐼 − 𝐵) = ( )−( )=( )=( )
0 1 0.7 0.6 −0.7 0.4 −0.7 0.4
0.6 −0.1
Now, |𝐼 − 𝐵| = | | = (0.6)(0.4) − (−0.7)(−0.1) = 0.24 − 0.07 = 0.17 > 0
−0.7 0.4
Since, diagonal elements are positive and |𝐼 − 𝐵| is positive, Hawkins – Simon
conditions are satisfied. Hence the system is viable.
0.4 0.1
Now 𝑎𝑑𝑗(𝐼 − 𝐵) = ( )
0.7 0.6
1 1 0.4 0.1
We have (𝐼 − 𝐵)−1 = |𝐼−𝐵| 𝑎𝑑𝑗(𝐼 − 𝐵) = (0.17) ( )
0.7 0.6
50
𝑋 = (𝐼 − 𝐵)−1 𝐷 where 𝐷 = ( )
100
𝑥1 1 0.4 0.1 50 1 0.4 × 50 + 0.1 × 100 176.5
(𝑥 ) = ( )( )( )= ( )=( )
2 0.17 0.7 0.6 100 0.17 0.7 × 50 + 0.6 × 100 558.8
So 𝑥1 = 176.5 𝑎𝑛𝑑 𝑥2 = 558.84
So the Steel output is 179.5 tonnes and Coal output is 558.8 tonnes.
Total lobour days required is = 5(𝑆𝑡𝑒𝑒𝑙 𝑜𝑢𝑡𝑝𝑢𝑡) + 2(𝐶𝑜𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡)
= 5(176.5) + 2(558.8) = 2000.1~2000 days

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 Exercise: 2

1. The following technology co-efficient matrix of an economics system of two industries.

0.5 0.3 0.6 0.9 0.50 0.25
(i) ( ); (ii) ( ) and ( )
0.41 0.33 0.2 0.8 0.40 0.67

Test whether the system is viable as per Hawkins – Simon conditions.

2. Two commodities A and B are produced such that 0.4 tonne of A and 0.7 tonne of B are
required to produce a tonne of A. Similarly 0.1 tonne of A and 0.7 tonne of B are needed
to produce a tonne of B. Write down the technology matrix. If 6.8 tonnes of A and 10.2
tonnes of B are required, find the gross production of both of them.
3. Suppose the inter-industry flow of the product of two industries is given as under.
Consumption sector
Production Consumption Sector Domestic
Gross output
Sector X Y Demand
X 30 40 50 120
Y 20 10 30 60
Determine the technology matrix and test Hawkin's -Simon conditions for the viability
of the system. If the domestic demand changes to 80 and 40 units respectively, what
should be the gross output of each sector in order to meet the new demands?
4. You are given the following transaction matrix for a two sector economy.
Scale Final
Sector Gross output
1 2 Demand
1 4 3 13 20
2 5 4 3 12
(i) Write the technology matrix.
(ii) Determine the output when the final demand for the output sector 1 alone
increases to 23 units.
5. Suppose the inter-industry flow of the product of two sectors X and Y are given as
under.
Production Consumption Sector Domestic
Gross output
Sector X Y Demand
X 15 10 10 35
Y 20 30 15 65
Find the gross output when the domestic changes to 12 for X and 18 for Y.

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