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Input – Output Analysis
MK Geografi Ekonomi
Dept. Geografi FMIPA UI
Next …………
A simple model of trade
Exports
Internal Goods
and Services
Imports
The Economic Base Model
ET = Total Employment
EX = Export Employment
EL = Local Employment
ET = EX + EL
(1)
Define a = EL/ET
Multiply by ET and substitute into (1):
ET = EX + aET
Solve for ET:
ET = ( 1/1-a)EX
Example, Economic Base
Model
If a = .67
Then:( 1/1-.67) =( 1/.33) = 3
If EX = 500, then ET = 3 x 500 or 1500.
If EX rises to 750, ET becomes 3 x 750 or 2250
and if EX falls back to 400, ET declines to 1200
Measurement of the Economic
Base Multiplier
Direct Surveys
“Short-cut” Approaches:
Assumption or Assignment
Minimum Requirements
Location Quotients
Industry Specific Models:
Input-output
Regional econometric
Example of Minimum
Requirements
Minimum Requirements Manufacturing
0.12
0.1
0.08
0.06
0.04
0.02
0
mfg85
mfg95
10
100
1000
Total Employment (Thousands)
If total employment was 100,000, then minimum requirements
is 6%, or 6,000. If actual employment were 10,000, 4,000 would
be assigned to exports.
Repeat for all industries, sum local shares to obtain “a”
Example of Location Quotient
Approach to Economic Base
Industry
Jobs
Agriculture 500
Mining
300
Manufacturing1000
Retail
1500
Services
3000
Total
6300
LQ
0.8
5.0
2.0
1.0
1.2
Export
0
240
500
0
500
Local
500
60
500
1500
2500
1240
5060
a = 5060/6300 = .803, so (1/1-.803) = 5.08
Size of Region and Size of
Multiplier
1.0
.67
Wn.State
Mult. = 3
World - Mult = 
Individual
Log Population
Sells all labor
a = 0, multiplier = 1.0
Regional Input-Output Models
Final Demand
Industry
1
Industry
2
Consumption
Investment
Govt.
Exports
Total
Sales
Industry 1
Industry 2
Labor
Income
Other
Value
Added
Imports
Total
Purchases
Total Sales = Total Purchases
Total Sales = Intermediate Sales + Final Sales
Total Purchases = Intermediate Purchases + Value Added
+ Imports
Washington State
Input-Output Model
Handouts: Transactions Table
Direct Requirements Matrix
Direct & Indirect Requirements Matrix
Direct, Indirect, & Induced Requirements
Matrix
Input-Output Notation
=
Direct, Indirect
& Induced
Requirements
Matrix
X
Final Demand
Output
Impact Analysis Using I/O
Models
Employment Impacts calculated from Output Impacts
Impact Analysis with I/O
Models
Key Inputs: Final Demand values for
output, income, and jobs
Key modeling requirements: I/o model
relevant to the problem
Results: usually reported for jobs,
income, output, and taxes
Direct & Indirect Output
Multipliers
1
Natural Resources
Food Products
Forest Products
Machinery
Aerospace
Other Mfg
Construction
T.C.U.
Trade
Services
1.2
1.4
1.6
1.8
2
Direct & Indirect Labor Income
Per Dollar of Final Demand
0
Natural Resources
Food Products
Forest Products
Machinery
Aerospace
Other Mfg
Construction
T.C.U.
Trade
Services
0.1
0.2
0.3
0.4
0.5
0.6
Direct & Indirect Jobs Per $
Million Final Demand
0
Natural Resources
Food Products
Forest Products
Machinery
Aerospace
Other Mfg
Construction
T.C.U.
Trade
Services
5
10
15
20
25
Output Multipliers
1.00
1.50
2.00
2.50
3.00
Natural Resources
Food Products
Forest Products
Machinery
Direct & Indirect
Aerospace
Other Mfg
Construction
T.C.U.
Trade
Services
Direct, Indirect &
Induced
Labor Income Multipliers
0
0.2
0.4
0.6
0.8
1
Natural Resources
Food Products
Forest Products
Machinery
Direct & Indirect
Aerospace
Other Mfg
Direct, Indirect, &
Induced
Construction
T.C.U.
Trade
Services
Labor Income
Per $ Final Demand
Employment Multipliers
0
5
10
15
20
25
30
Natural Resources
Food Products
Forest Products
Machinery
Aerospace
Other Mfg
Construction
T.C.U.
Trade
Services
Direct & Indirect
Direct, Indirect &
Induced
Regional Models, continued
• Regional Econometric Models
• Interregional Input-output
models
• Structural Change
Regional Econometric Models
The Washington Projection & Simulation
Model
Coefficient
Change
Imports
Output
(I/O Relations)
Income
Employment
and
Population
Consumption
Exports
National
Econometric
Model
State & Local
Government
Investment
Productivity Rates
Wage rates, tax rates, nonearnings income
WPSM Simulation of Change in
Aerospace Exports
Aerospace Exports
160
140
Value-added
120
Consumption
100
80
State & Local
Expenditures
60
Fixed Investment
40
Disposable Income
20
0
1975
Persons Employed
(hundreds)
1980
1985
Population
(hundreds)
Multiregional Models
Region B
Region A
Region D
Region C
Multiregional Input-Output Model
(intermediate & final transactions
including interregional value added
payments)
AA
BA
CA
DA
AB
BB
CB
DB
Feedback Loops
AC
BC
CC
DC
AD
BD
CD
DD
Simulation of Columbia Basin
Irrigation Project Development
United States (AK & HI Inset)
Project Region
Other Washington
Jobs
Estimate of Employment
Impacts from Multiregional
Model
4000
3500
3000
2500
2000
1500
1000
500
0
Local Agriculture
Local Food
Products
Other Local Jobs
Project Construction
Other Washington
Jobs
0
10
Project Year
20
Gross Output Levels
Required to Deliver 1961
Final Demand
General 37.6%
Industries
39.8%
Materials 18.5%
Metalworking
& Chemicals
13.6%
17.0%
All Other 30.3%
Total Gross
Output
14.5%
40.8%
14.7%
16.0%
28.8%
28.5%
677
1939
689
1947
686
1961
Employment Required to Deliver 1961
Final Demand with earlier Technologies
100%
101
86
58
80%
Millions of man-years
All Other
Chemicals
60%
Metalworking
40%
Materials
20%
General Industries
0%
1939
1947
1961
Source: A. Carter, Structural Change in the American Economy
Capital Stock Required to Deliver 1961
Final Demand
$ 1961 F.D.
100%
662
617
523
All Other
80%
Chemicals
60%
Metalworking
40%
Materials
20%
General Industries
0%
1939
1947
1958
U.S. Structural Change Output, GNP, Intermediate
Production
Gross
National 51.2%
Product
Intermediate
Sales
48.8%
Total Gross
Output
270
1939
50.7%
51.2%
49.3%
48.8%
435
1947
688
1961
Input-Output Model Basics
Disadur dari bahan kuliah:
Tom Harris
University of Nevada, Reno
University Center for Economic Development
MS 204
Reno, NV 89557-0105
and
Gerald A. Doeksen
Oklahoma State University
Oklahoma Cooperative Extension Service
515 Ag Hall
Stillwater, OK 74078
Examples of Interrelationships
Between Sectors:
•
•
•
•
Sectors purchase from other sectors
Sectors sell to other sectors
Sectors sell outside the local economy
Sectors buy outside the local economy
Inputs
$
Overview of
Community
Economic
System
$
Products
Basic
Industry
Labor
$
$
Inputs
Goods &
Services
Households
$
$
Services
$
Input-Output analysis creates a
picture of a regional economy
describing flows to and from
industries and institutions
What Input-Output Analysis Can Do:
• Input-Output Analysis is an accounting
framework
• Input-Output analysis can be used to
predict changes in overall economic
activity as a result of some change in the
local economy
Uses of Input-Output Analysis
• Provides a description of a local
economy
• Predictive model to estimate impacts
3 Basic Components of
Input-Output Models
• Transactions Table
• Direct Requirements Table
• Total Requirements Table
Transactions Table
• A transactions table shows the monetary
flows of goods and services in a local
economy
• Represents monetary flows for a given
time period, usually one year
Transactions Table Flows
• Total outlays = Total output
• Intermediate purchases are goods and services
purchased and used in the local production
process
• Final demands are purchases for final
consumption
• Final payments are payments for factors or
inputs outside intermediate production process
Example Transactions Table
Purchasing Sectors ($ million)
Agriculture Health
Selling Sectors
($ million)
Agriculture
Services
Final
Total
Demands Output
10
6
2
18
36
Health
4
4
3
26
37
Services
6
2
1
35
44
Final
Payments
16
25
38
0
79
Total Input
36
37
44
79
196
Predictive Use
of Input-Output Analysis
• Impacts are tracked throughout the
economy
• The multipliers are derived from regional
economic accounts
• Only local transactions are used to create
the multiplier effect
Direct Requirements Table
• Direct requirements are the purchases of
resources (inputs) by a sector from all
sectors to produce one dollar of output
• Creates a production recipe
Direct Requirements Table
Purchasing Sectors
Selling Sectors
Agriculture
Health
Services
Agriculture
0.278
0.162
0.045
Health
0.111
0.108
0.068
Services
0.167
0.054
0.023
Final Payments
0.444
0.676
0.864
Total
1.000
1.000
1.000
What are Multipliers?
Multipliers measure total change
throughout the economy
from one unit change
for a given sector.
Three Types of Multipliers
are calculated from Model
1. Output
2. Employment
3. Income
Three levels of Multipliers
Type I Multipliers
Type II Multipliers
Type III Multipliers
Type I Multipliers
• Include direct or initial spending
• Include indirect spending or businesses
buying and selling to each other
• The multiplier is direct plus indirect effect
divided by direct effect
Type II Multipliers
• Includes Type I Multiplier effects
• Plus household spending based on the
income earned from the direct and indirect
effects – the induced effects
TYPE III MULTIPLIERS
• Type III Multipliers are modified Type II
multipliers.
• Therefore, Type III Multipliers also include
the direct, indirect, and induced effects.
• Type III Multipliers adjust Type II
Multipliers based on spending patterns
amongst different income groups.
Type I Multipliers include:
 Direct
 Indirect (Business Spending)
Type I Multipliers are derived from the
Total Requirements Table
In math, this is:
X = (1-A)-1 Y
Total Requirements Table
Purchasing Sectors ($ million)
Agriculture
Health
Services
Selling Sectors
($ million)
Agriculture
1.446
0.268
0.085
Health
0.199
1.163
0.090
Services
0.258
0.110
1.043
Total
1.903
1.541
1.218
Explaining the Health Sector
Type I Multiplier
• For a $1.00 change in final demand sales
in the local economy, the total direct and
indirect impacts are $1.541
Type II Multipliers include:
 Direct
 Indirect (Businesses)
 Induced (Households)
Type II Multipliers are derived from
the Total Requirements Table with
Households
Transactions Table with Households
Purchasing Sectors ($ million)
Selling Sectors
($ million)
Ag
Health
10
6
2
2
16
36
Health
4
4
3
10
16
37
Services
6
2
1
7
28
44
Households
3
6
10
0
0
19
Final
Payments
13
19
28
0
0
60
Total Input
36
37
44
19
60
196
Ag
Services Households
Final
Total
Demands Output
Total Requirements Table
with Households
Purchasing Sectors
Selling Sectors
Agriculture
Health
Services Households
Agriculture
1.536
0.369
0.197
0.429
Health
0.386
1.370
0.318
0.879
Services
0.388
0.256
1.203
0.619
Households
0.279
0.311
0.341
1.319
Total
2.589
2.307
2.059
3.245
Explaining the Health Sector
Type II Multiplier
For a $1.00 change in final
demand sales in the local
economy, the total direct, indirect
and induced impacts are $2.307
Multipliers
• Direct requirements represent direct or initial
spending
• Direct and indirect effects include the direct
spending plus the indirect spending or
businesses buying and selling to each other
• Direct, indirect and induced effects include direct
and indirect plus household spending earned
from direct and indirect effects
Other Multipliers
• Employment Multipliers
Type I
Type II
Type III
• Income Multipliers
Type I
Type II
Type III
Example Type I Employment Multiplier
• Agricultural Sector Type I Employment
Multiplier = 1.43
When the Agricultural Sector realizes a 1
employee change, total employment in the
study area changes by 1.43 jobs from direct
and indirect linkages
Example –
Type II Employment Multiplier
• Agricultural Sector Type II Employment
Multiplier = 2.25
When the Agricultural Sector realizes a 1
employee change, total employment in the
study area changes by 2.25 jobs from direct,
indirect and induced linkages
Breakdown of
Type II Employment Multiplier Agricultural Sector
Direct Effects
Indirect Effects
Induced Effects
Total
=
=
=
1.00
0.43
0.82
=
2.25
Example –
Type I Income Multiplier
• Agricultural Sector Type I Income
Multiplier = 1.96
When the Agricultural Sector realizes a $1.00
change in income, total income in the study
area changes by $1.96 from direct and
indirect linkages
Example Type II Income Multiplier
• Agricultural Sector Type II Income
Multiplier = 2.50
When the Agricultural Sector realizes a $1.00
change in income, total income in the study
area changes by $2.50 from direct, indirect
and induced linkages
Breakdown of
Type II Income Multiplier Agricultural Sector
Direct Effects
=
Indirect Effects =
Induced Effects =
$1.00
$0.96
$0.54
Total
$2.50
=
Caution When Using Multipliers
• Multiplier values include direct
effects
• Do not aggregate sector multipliers
to derive an aggregate multiplier
• Be cautious of large multipliers
• Be cautious in using a multiplier
from another study area
Procedures Used
For This Analysis
• IMPLAN (IMPact analysis for PLANning)
*
*
*
Geographical database
Software and data for model
construction and impact analysis
History of IMPLAN
IMPLAN USE FOR HEALTH
SECTOR ANALYSIS
• Develop county-wide input-output model
• From State Employment Security Offices
derived health sector employment
• Use IMPLAN to derive county-wide output,
employment, income and sales tax
impacts from the local health sector
Database of IMPLAN
•
•
•
•
528 Industrial Sectors
Most 3 or 4 digit SIC
All standard counties in the U.S.
Now available at zip code level
Any Questions?
Econ Base vs Input-Output Models
• Leontief developed an “input-output” method for estimating
economic impacts and tracing the flows of dollars. Leontief
later won the Nobel Prize in 1973, largely related to this
work.
• Input-Output expands heavily upon the economic base
model of the economy.
1)
2)
3)
4)
Economic Base Techniques
Basic and Non-basic sectors
Ripple (multiplier) effects
analyzed at the B/NB level
Analyzes changes and impacts
at a gross B/NB level
Very general, but…
1)
2)
3)
4)
Input-Output Analysis
Many different
industries/sectors
Ripple (multiplier) effects
contained in the interindustry
transactions
Analyzes changes and impacts
at a sector by sector level,
tracing flows of dollars
between industries
Much more precise, but…
The Economic Base Theoretical Model
• The EB model assumes that the basic sector is the
primary cause of local economic growth; that is, it is the
economic base of the local economy.
Non-Local
$$$’s
Basic Sector
Employment
Local
$$$’s
Non-Basic Sector
Employment
The Local Economy
Input-Output Model
• The IO model is centered on the idea of inter-industry
transactions:
– Industries use the products of other industries to
produce their own products.
– For example - automobile producers use steel,
glass, rubber, and plastic products to produce
automobiles.
– Outputs from one industry become inputs to
another.
– When you buy aTaken
car,
you affect the demand for
from a Power Point presentation prepared by
Pam Perlich
at the University of Utah.
glass, plastic, steel,
etc.
http://www.business.utah.edu/~bebrpsp/IO/IO.ppt
Basic Input-Output Logic
Steel
Glass
Tires
Plastic
Automobile Factory
Other
Components
From the Tire
Producer’s
Perspective
Individual
Consumers
School
Districts
Tire Factory
FINAL
DEMAND
FOR TIRES
Trucking
Companies
Automobile
Factory
INTERMEDIATE
DEMAND
FOR
TIRES
Input-Output Analysis: The BIG Point
• The implicit assumption in economic base techniques is that each
basic sector job has a multiplier (or ripple) effect on the wider
economy because of purchases of non-basic goods and services to
support the basic production activity. (the Basic Sector drives the
Non-basic Sector)
• However, we know that Non-basic sector businesses purchase Nonbasic goods and services and Basic sector businesses purchase
Basic sector goods and services. There are inter-industry linkages
not contained within the Economic Base model. The economy is
much more complex than the economic base techniques allow or
attempt to model.
• The central advantage of Input-Output analysis is that it tries to
estimate these inter-industry transactions and use those figures to
estimate the economic impacts of any changes to the economy.
• Instead of assuming a change in a basic sector industry having a
generalized multiplier effect, the IO approach estimates how many
goods and services from other sectors are needed (inputs) to
produce each dollar of output for the sector in question. Therefore it
is possible to do a much more precise calculation of the economic
IO Conceptualization of the Economy
• The major conceptual step is to divide the economy into
“purchasers” and “suppliers”.
--Primary Suppliers: They sell primary inputs (labor, raw materials)
to other industries. Payments to these suppliers are “primary
inputs” because they generate no further sales. (example:
Households)
--Intermediate Suppliers: They purchase inputs for processing into
outputs they supply to other firms or to final purchasers.
(example: Automaker)
--Intermediate Purchasers: They purchase outputs of suppliers for
use as inputs for further processing. (example: Automaker)
--Final Purchasers: Purchase the outputs of suppliers in their final
form and for final use. (example: Households)
• Intermediate Suppliers and Intermediate Purchasers are the
same thing!
• Primary Suppliers and Final Purchasers may or may not be the
same entities. When they are the same (households), these
Simplified Circular Flow View of The
Economy
$$ Consumption Spending (Yi)
Goods & Services
Households
Businesses
Businesses
Labor
$$ Wages & Salaries
Households buy
the output of
business: final
demand or Yi
Households sell
labor & other
inputs to business
as inputs to
production
Taken from a Power Point presentation
prepared by Pam Perlich at the University of Utah.
http://www.business.utah.edu/~bebrpsp/IO/IO.ppt
Businesses purchase from
other businesses to produce
their own goods / services.
This is intermediate
demand or xij (output of
industry i sold to industry j)
The Structure of IO Analysis
• The ultimate goal of the Input-Output Analysis technique is to
generate a Total Requirements Table that shows the flows of
dollars between industries in the production of output for a
given sector.
• To arrive at this final result, IO Analysis requires two earlier
steps:
1) Transactions table: Contains basic data on the flows of
goods and services among suppliers and purchasers during a
study year.
2) Direct requirements table: Derived from the transactions
table, this shows the inputs required directly from different
suppliers by each intermediate purchaser for each unit of
output that purchaser produces.
• “Input output analysis can be thought of as documenting and
exploring the precise systems of interindustry exchange
through which different components of regional product
become different components of regional income.” (Bendavid-
The Transaction Table and Direct Reqs
Tables
The Transactions Table
(in thousands of units)
Intermediate Purchasers
--Agriculture --Manufacturing
Intermediate Suppliers
--Agriculture
--Manufacturing
Primary Suppliers
--Households
Total Purchases (inputs)
Final Purchasers
--Households
Total
Sales (outputs)
10
5
30
10
60
35
100
50
85
10
15
110
100
50
110
260
Direct Requirements Table
(in thousands of units)
Purchasers
--Agriculture --Manufacturing
Intermediate Suppliers
--Agriculture
--Manufacturing
Primary Suppliers
--Households
Total Purchases (inputs)
0.10
0.05
0.60
0.20
0.85
0.20
1.00
1.00
Every unit of output
requires inputs of a certain
amount from other areas
of the economy.
The First Round of Economic Impacts
Direct Requirements Table
(in thousands of units)
Intermediate Purchasers
--Agriculture
--Manu
Intermediate Suppliers
--Agriculture
0.10
0.60
--Manufacturing
0.05
0.20
Primary Suppliers
--Households
0.85
0.20
Total Purchases (inputs)
1.00
1.00
Total Requirements Calculation (First Round)
(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch.
To Agr
To Manu Total
By Agriculture
200
20
60
80
By Manufacturing
100
10
20
30
By Households
0
170
20
190
Total indirect rounds
By All Supliers
300
300
To
Rd. 2
The Second-Fourth Rounds of Econ.
Impacts
Total Requirements Calculation (Second
Round)
(in thousands of units)
By Agriculture
By Manufacturing
By Households
Total indirect rounds
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
80
8.0
18.0
26.0
30
4.0
6.0
10.0
0
68.0
6.0
74.0
110.0
Total Requirements Calculation (Third Round)
(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
By Agriculture
26
2.6
6.0
8.6
By Manufacturing
10
1.3
2.0
3.3
By Households
0
22.1
2.0
24.1
Total indirect rounds
36.0
Total Requirements Calculation (Fourth Round)
(in thousands of units)
Sales to
Sales as Direct Inputs
Final Purch. To Agr
To Manu Total
By Agriculture
8.6
0.9
2.0
2.8
By Manufacturing
3.3
0.4
0.7
1.1
By Households
0
7.3
0.7
8.0
Total indirect rounds
11.9
and so on
until the mult.
effect ends
The Total Requirements Results
Total Direct and Indirect Requirements Calculation
(in thousands of units)
Sales to Final
Total
Total
Purchasers
Direct Sales Indirect Sales
Agriculture
200.0
80.0
38.7
Manufacturing
100.0
30.0
14.9
Households
-190.0
109.6
Total
300.0
300.0
163.1
Total
Sales
318.7
144.9
299.6
763.1
When:
1) there are “Final Sales” of Agriculture = 200 and “Final Sales” of
Manufacturing = 100
2) we see a Total Economic Impact = 763.1, with that impact broken
down as:
1) 300.0 in Initial Sales to Final Purchasers
2) 300.0 in Total Direct Sales
3) 163.1 in Total Indirect Sales
The 300 units in Final Sales generate an additional 463.1 units of
economic activity. This illustrates the multiplier effect captured by
IO models.
The Total Requirements Table
Total Requirements Table
Requires Total Sales by
Agriculture
Manufacturing
Households
Total
Every Unit in Final Demand of…
Agriculture
Manufacturing
1.15
0.86
0.07
1.29
1.00
1.00
2.22
3.15
For Agriculture
1.00 Sales to Final Purchasers
1.00 Sales by Primary Suppliers
0.22 Interindustry transactions
Similar to our Base Multiplier in Econ Base Theory
A 1.0 unit increase in demand for agriculture leads to
a total of 2.22 of sales.
For Manufacturing
1.00 Sales to Final Purchasers
1.00 Sales by Primary Suppliers
1.15 Interindustry transactions
Similar to our Base Multiplier in Econ Base Theory
A 1.0 unit increase in demand for manufacturing leads to
a total of 3.15 of sales.
RIMS Multipliers
• The Bureau of Economic Analysis (BEA) produces State Level
Regional Input-Output Multipliers by industrial sector which are
often used as the basis for constructing an IO model.
• Originally developed in the 1970s, RIMS (Regional Industrial
Multiplier System) multipliers are used for “impact analysis” for a
given economy.
• RIMS II data were developed in the 1980’s (latest version is
1998)
• Users can purchase data from BEA for $275 per region. BEA
provides handbooks for the use of this data.
• County or multi-county regional RIMS data come in two series
Series I: for 490 detailed industries
Series II: for 38 industry aggregations
• Empirical analysis shows that RIMS II data is accurate within 5%
of locally developed industry multipliers.
• Advantages of the RIMS Multipliers:
1) Cheap
2) Can be compared across regions
3) Detailed industries 4) Updated regularly to reflect new
data
Example RIMS Multipliers
1Total
dollar impact due to $1 in output in the industry. 2Change in earnings due to $1 change in
industry. 3Change in employment resulting from $1 million increase in output delivered to final demand.
For More Info on RIMS Multipliers
• The Bureau of Economic Analysis (BEA) has several web
resources on RIMS Multipliers and how they are
prepared:
RIMSII Home Page
http://www.bea.doc.gov/bea/regional/rims/
Brief Description of RIMS II
http://www.bea.doc.gov/bea/regional/rims/brfdesc.cfm
RIMSII User’s Handbook
http://www.bea.doc.gov/bea/ARTICLES/REGIONAL/PERSI
NC/Meth/rims2.pdf
The Problems with IO Analysis
Practical Issues
• Data needs and complexity: IO models are tremendously complex
and very data hungry. This typically places these models in the
hands of experts.
Theoretical Issues
• Time/Data issues: Usually a single year’s data are used to develop
the Total Requirements Table. But 1) purchases may actually reflect
a longer term investment and 2) short term trends may impact the
data.
• Stability of the technical coefficients over time: Technology changes,
prices change, and demand changes, all affecting the coefficients in
the Tot Reqs Table. This can impact the results if the coefficients are
“out of date”.
• IO assumes a linear relationship between increasing demand for
inputs and outputs: This assumes away 1) externalities and 2)
increasing/ decreasing returns to scale.
• Industrial categorization: IO models still assume that each industry
1) has a single, homogeneous production function and 2) each
produces one product. These assumptions do not reflect the real
The Power of IO Models
• Despite these problems IO analysis is a tremendously popular
and powerful analytical tool.
• “The chief value of regional input-output analysis is in its
descriptive analytical power.” (Bendavid-Val, p.113)
• “As a descriptive tool, input-output tables:
-present an enormous quantity of information in a concise,
orderly, and easily understood fashion;
-provide a comprehensive picture of the interindustry structure
of the regional economy;
-point up the strategic importance of various industries and
sectors;
-highlight possible opportunities for strengthening regional
income and employment multiplication.” (Bendavid-Val, p.113)
• Urban Planners should be capable of understanding the
structure, assumptions, and data requirements of Input-Output
Analysis. While you may not be performing this analysis in your
jobs, you almost certainly will come across this type of work
sometime in your career.