2.

6 More Applications of Matrix Operations 97

LEONTIEF INPUT-OUTPUT MODELS

In 1936, American economist Wassily W. Leontief (1906–1999) published a model
concerning the input and output of an economic system. In 1973, Leontief received a
Nobel prize for his work in economics. A brief discussion of Leontief’s model follows.
Consider an economic system that has n different industries I1, I2, . . . , In , each
having input needs (raw materials, utilities, etc.) and an output (finished product).
In producing each unit of output, an industry may use the outputs of other industries,
including itself. For example, an electric utility uses outputs from other industries, such
as coal and water, and also uses its own electricity.
Let dij be the amount of output the jth industry needs from the ith industry to produce
one unit of output per year. The matrix of these coefficients is the input-output matrix.
User (Output)
I1 I2 . . . In

[ ]
d11 d12 . . . d1n I1
d21 d22 . . . d2n I2
D= Supplier (Input)
⋮ ⋮ ⋮ ⋮
dn1 dn2 . . . dnn In
To understand how to use this matrix, consider d12 = 0.4. This means that
for Industry 2 to produce one unit of its product, it must use 0.4 unit of Industry 1’s
product. If d33 = 0.2, then Industry 3 needs 0.2 unit of its own product to produce one
unit. For this model to work, the values of dij must satisfy 0 ≤ dij ≤ 1 and the sum of
the entries in any column must be less than or equal to 1.

Forming an Input-Output Matrix

Consider a simple economic system consisting of three industries: electricity, water,

and coal. Production, or output, of one unit of electricity requires 0.5 unit of itself,
0.25 unit of water, and 0.25 unit of coal. Production of one unit of water requires
0.1 unit of electricity, 0.6 unit of itself, and 0 units of coal. Production of one unit of
coal requires 0.2 unit of electricity, 0.15 unit of water, and 0.5 unit of itself. Find the
input-output matrix for this system.
SOLUTION
The column entries show the amounts each industry requires from the others, and from
itself, to produce one unit of output.
User (Output)
E W C

[ ]
0.5 0.1 0.2 E
0.25 0.6 0.15 W Supplier (Input)
0.25 0 0.5 C
The row entries show the amounts each industry supplies to the others, and to itself,
for that industry to produce one unit of output. For instance, the electricity industry
supplies 0.5 unit to itself, 0.1 unit to water, and 0.2 unit to coal.

To develop the Leontief input-output model further, let the total output of the
ith industry be denoted by xi . If the economic system is closed (that is, the economic
system sells its products only to industries within the system, as in the example above),
then the total output of the ith industry is
xi = di1x1 + di2 x2 + . . . + din xn. Closed system

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98 Chapter 2 Matrices

On the other hand, if the industries within the system sell products to nonproducing
groups (such as governments or charitable organizations) outside the system, then the
system is open and the total output of the ith industry is
xi = di1x1 + di2 x2 + . . . + din xn + ei Open system

where ei represents the external demand for the ith industry’s product. The system of
n linear equations below represents the collection of total outputs for an open system.
x1 = d11x1 + d12 x2 + . . . + d1n xn + e1
x2 = d21x1 + d22 x2 + . . . + d2n xn + e2
⋮
xn = dn1x1 + dn2 x2 + . . . + dnn xn + en
The matrix form of this system is X = DX + E, where X is the output matrix and E
is the external demand matrix.

Solving for the Output Matrix

of an Open System
See LarsonLinearAlgebra.com for an interactive version of this type of example.

An economic system composed of three industries has the input-output matrix shown
below.
User (Output)
A B C

[ ]
0.1 0.43 0 A
D = 0.15 0 0.37 B Supplier (Input)
0.23 0.03 0.02 C
Find the output matrix X when the external demands are

[ ]
20,000 A
E = 30,000 . B
25,000 C

SOLUTION
Letting I be the identity matrix, write the equation X = DX + E as IX − DX = E,
which means that (I − D)X = E. Using the matrix D above produces

[ ]
0.9 − 0.43 0
REMARK I − D = − 0.15 1 − 0.37 .
The economic systems − 0.23 − 0.03 0.98
described in Examples 4 and 5
are, of course, simple ones. Using Gauss-Jordan elimination,
In the real world, an economic

[ ]
1.25 0.55 0.21
system would include many
industries or industrial groups. (I − D)−1 ≈ 0.30 1.14 0.43 .
A detailed analysis using 0.30 0.16 1.08
the Leontief input-output
So, the output matrix is
model could easily require

[ ][ ] [ ]
an input-output matrix greater 1.25 0.55 0.21 20,000 46,750 A
than 100 × 100 in size. Clearly, X = (I − D) E ≈ 0.30 −1
1.14 0.43 30,000 = 50,950 B
this type of analysis would
0.30 0.16 1.08 25,000 37,800 C
require the aid of a computer.
To produce the given external demands, the outputs of the three industries must be
approximately 46,750 units for industry A, 50,950 units for industry B, and 37,800 units
for industry C.

Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.