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Math 547
Research Project
Minju Kim
Leontief Input-Output Model
(Application of Linear Algebra to Economics)
Introduction
Professor Wassily Leontief started input-output model with a
question !what le"el of output should each of the n industries
in an economy produce in order that it will just #e sufficient to
satisfy the total demand for that product\$% Leontief &nput-
output analysis which was de"eloped #y Professor Wassily
Leontief in the '()*+s is a method used to analy,e the
relationships #etween sectors in an economy- .hese sectors are
interdependent on the other sectors in the economy- &n order to
produce somethin/ each sector needs to consume of its own
output and some of output from the other sectors- 0e de"eloped the models to model economies
usin/ empirical data- 0e di"ided 1-2- economy into 5** economic sectors and descri#ed the
interdependence #etween sectors with input-output matrices- With input-output model it #ecame
possi#le to determine the total output of industries that must #e produced to o#tain a /i"en
amount for final demand- 3y usin/ the Leontief &nput-output Model it is possi#le to find
production le"els which will meet the demands of all sectors inside and outside of that economy-
4n 4cto#er '5 in '(7) Wassily Leontief won 6o#el Pri,e in economy for this wor7 in this area-
.his analysis has #een used e8tensi"ely in economic production plannin/ and in de"elopin/
countries- 9lso #y loo7in/ at the Leontief &nput 4utput Model it is possi#le to tell whether an
economy is producti"e or non-producti"e-
Assumptions for the Input-Output Model
2ince Leontief input-output model normally can ha"e a lar/e num#er of industries and it will #e
quite complicated- :or a simplification the followin/ assumptions are adopted
1) ;ach industry produce only one homo/eneous commodity
2) ;ach industry uses a fi8ed input ratio for the production of its output
3) Production in e"ery industry is su#ject to constant return to scale <constant returns to
scale means 7-fold chan/e in e"ery input will result in an e8actly 7-fold chan/e in output=
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Using of Linear Algebra for the Model
.he Leontief model represents the economy as a system of linear equations- .o find P
<production "ector= in terms of d <demand "ector= we will sol"e sets of linear equations- 2uch
equations are naturally represented usin/ the formalism of matrices and "ectors- We will sol"e
linear equations with matri8 al/e#ra- &n matri8 al/e#ra we will use matri8 in"erses and matri8
multiplication- 9lso to find a solution we will use >aussian-elimination technique- .o decide if
the economy is producti"e we will use the 0aw7ins-2imons conditions-
The Open Leontief Model
.here is a ?losed Leontief Model where no /oods lea"e or enter the economy- 0owe"er in real
economic world it does not happen "ery often- 6ormally a certain economy has outside demand
from li7e /o"ernment a/encies- .herefore we will use the 4pen Leontief Model- &n 4pen
Leontief Model there are industries in an economy- ;ach industry has a demand for products
from other industries <internal demand=- 9lso there are e8ternal demands from outside- We will
find a production le"el for the industries that will satisfy #oth internal and e8ternal demands-
?onsider there are n interdependent industries <or sectors=@ 2' 2AB--2n
Let m
ij
@ the num#er of units produced #y industry 2i to produce one unit of industry
2i P
7
@ the production le"el of industry 2
7
m
ij
p
j
@ the num#er of units produced #y industry 2i and consumed #y industry
2
j
d
i
@ demand from the i
th
outside industry
.hen total num#er of units produced #y industry 2
i
p
iC
p
'
m
i'
D p
A
m
iA
D B D p
n
m
in
D d
i
:rom this we can /et linear equations
p
'
C m
''
p
'
D m
'A
p
A
D B D m
'n
p
n
Dd
'
p
A
C m
A'
p
'
D m
AA
p
A
D B D m
An
p
n
D d
A
: : : : :
p
n
C m
n'
p
'
D m
nA
p
A
D B D m
nn
p
n
Dd
n
We can ha"e matri8 9 and "ectors P and d
( ) ( ) ( )
9 C [
(
) ( ) (
)
]
PC [ ] and dC[ ]
( ) ( ) ( )
We can write a#o"e linear equations as P C 9P D d
Matri8 9 is called input-output matri8 or consumption matri8- 9 consumption matri8 shows the
quantity of inputs needed to produce one unit of a /ood- .he rows of the matri8 represent the
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producin/ sector of the economy- .he columns of the matri8 represent the consumin/ sector of
the economy- .he entry m
ij
in consumption matri8 represent what percent of the total
production "alue of sector j is spent on products from sector i- d is the demand "ector- Eemand
"ector d represents demand from the non-producin/ sector of the economy- Fector P represents
the total amount of the product produced-
P C 9P D d G [ ] C [ ] D [ ]
.o sol"e this linear system
P C 9P D d H <& I 9=P C d H P C <&-9=
-'
d
&f consumption matri8 9 and demand "ector d ha"e nonne/ati"e entries and if consumption
matri8 9 is economically feasi#le then the in"erse of the matri8 <&-?= e8ists and the production
"ector P has nonne/ati"e entries and has the unique solution for the model- We call matri8 9 is
producti"e in this case-
The Open Leontief Model ith !eal "ata
.o help understandin/ how the 4pen Leontief Model wor7s & ha"e a real data to e8plain-
9/riculture Manufacturin/ 2er"ices 4pen 2ector
9/riculture )4-J( 4-(A 5-JA )(-A4
Manufacturin/ 5-A5 J'-A5 AA-(( J*-*A
2er"ices '*-45 A5-(5 4A-*) ')*-J5
.otal >ross 4utput 54-5J 'J)-4) A'(-*)
K;8chan/e of >oods and 2er"ices in the 1-2- for '(47 <in #illions of '(47 dollars=L
3y di"idin/ each column of a ) M ) ta#le #y the .otal >ross 4utput for sectors we can /et the
consumption matri8 from the ta#le-
&n this data open economy consists of three industries@ 9/riculture Manufacturin/ 2er"ices-
.hese three industries depend upon each other- .o produce N' of 9/riculture 9/riculture must
purchase N*-4'*A of its own production N*-*JA4 of Manufacturin/ and N*-'A)J worth of
2er"ices- .o produce N' worth of Manufacturin/ it needs N*-*)*' of 9/riculture N*-)75) of
Manufacturin/ and N*-'555 of 2er"ices- .o produce N' worth of 2er"ices 2er"ices industry
must #uy N*-*A57 of a/riculture N*-'*5* of Manufacturin/ and N*-'('( of 2er"ices- .here is an
e8ternal demand of N)(-A4 worth of 9/riculture NJ*-*A worth of Manufacturin/ and N')*-J5
worth of 2er"ices- We can find the production le"el of each three industries with the 4pen
Leontief Model to satisfy #oth internal and the e8ternal demands-
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#olution for !eal "ata using the Open Leontief Model
.he input-output matri8 <or consumption matri8= of the economy is
9 C [ ] -
Matri8 9 is showin/ relationships of inputs consumed per unit of sector output-
;8ternal demand for the economy is d C [ ]
P C <& I 9=
-'
d
& I 9 C [ ]
.o find out <& I 9=
-'
first we need to 7now if in"erse of <&-9= e8ists-
&n )8) matri8 3 C [ ]-
.here e8ists an in"erse of matri8 3 det3 C #
''
#
AA
#
))
D#
A'
#
)A
#
')
D#
)'
#
'A
#
A)
-#
''
#
)A
#
A)
-#
)'
#
AA
#
')
-
#A'#'A#)) * and it is
3
-'
C
[ ]
2ince det<&-9=C*-55(5O*-JA'7O*-5*5'D*-()7JO*-54'AO*-(74)D*-57J4O*-(J((O*-5(5*-
*-55(5O*-54'AO*-5(5*-*-57J4O*-JA'7O*-(74)-*-()7JO*-(J((O*-5*5'C*-''575AP* there e8ists
an in"erse of matri8 <&-9=-
<& I 9=
-'
C [ ]
P C <& I 9=
-'
d C [ ] [ ] C [ ]
.herefore the total output of the 9/riculture must #e N5A-4*- .he total output for the
Manufacturin/ must #e N')5-55- .he total output for the 2er"ices sector is NA*'-57-
5
4r we can /et a production "ector usin/ the >auss elimination method-
Q &n"erti#ility
9n n 8 n matri8 ? is in"erti#le if <and only if= rref <?= C
&n or equi"alently if Ran7<?= C n
[ ] C
[ ] G[ ]
G[ ] [ ]
) 8 ) matri8 <&-9= is in"erti#le since rref <&-9=C &
)
and Ran7<&-9=C )- 2o in"erti#le matri8 of
matri8 &-9 e8ists- .herefore we can /et <& I 9=
-'
C [ ]
Which /i"es P C <& I 9=
-'
d C [ ] [ ] C [ ]
\$haracteristics on \$onsumption Matrices A in Open Leontief Model
&n the ?losed Leontief Model where no /oods lea"e or enter the economy consumption matrices
would ha"e columns addin/ to one- 0owe"er in the 4pen Leontief Model the sum of columns
in consumption matri8 must #e less than '- &n a real data used a#o"e a consumption matri8 9 C
[ ]- We can chec7 that the sums of each column are less than '- <.he
sum of first columnC *-4'*AD*-*JA4D*-'A)JC*-5(JA K ' the sum of second columnC
*-*)*'D*-)75)D*-'555C*-5J7A K ' the sum of third columnC
*-*A57D*-'*5*D*-'('(C*-)AAJ K'= 2ince sums of each column represent the partial input
cost incurred in producin/ a dollar+s worth of some commodity- &f the sum is /reater than or
equal to N' production will not #e economically justifia#le-
?oefficients of the consumption matri8 must #e positi"e- &n order to meet demand there are
certain restrictions in 4pen Leontief Model- :irst the equation that is #ein/ sol"e is
P C <& I 9=
-'
d- &f an in"erse does not e8ist then it is impossi#le to sol"e for the production "ector-
9lso a positi"e production "ector is necessary- 3ecause the demand "ector is always positi"e
multiplyin/ the demand #y the in"erse of &-9 needs to result in a positi"e production "ector- :or
this <&-9=
-'
needs to #e a positi"e definite matri8- With #asic economic 7nowled/e an increase
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Rd L * in final demand in equation P C <& I 9=
-'
d should result in an increase RP L * in total
output- .herefore if the matri8 <& I 9=
-'
is not positi"e the lo/ic is "iolated-
3ein/ a positi"e definite matri8 <<& I 9=
-
'= assures that the economy can meet any /i"en
demand- When this happens consumption matri8 9 and the economy are called producti"e-
Is the Econom% &roducti'e(
6ow we 7now that e8istence of positi"e definite matri8 <<& I 9=
-
'= tells us consumptions matri8
9 and the economy are producti"e- .o chec7 if the economy is producti"e we will try to find out
that in"erse of matri8 <& I 9= is a positi"e definite matri8- :or this we will use the 0aw7ins-
2imons conditions-
Q .he 0aw7ins-2imons conditions say
H &f all the principal leadin/ minors of a matri8 are positi"e then an in"erse e8ists and
is nonne/ati"e-
.he principal leadin/ minors of a matri8 are set of determinants from su#-matrices of a certain
matri8- &n the 4pen Leontief &nput-4utput Model they come from <& I 9=- .he principal leadin/
minors start with the determinant of the entry which is left after e"ery row e8cept the first is
omitted and e"ery column e8cept the first is omitted- .he second principal leadin/ minor
e8cludes e"ery row past the second and e"ery column past the second- 1ntil the determinant of
the entire matri8 is ta7en this pattern needs to continue-
:or e8ample in a matri8
[ ]
.he first principal leadin/ minor@ the determinant of a'' or Sa''S- .he second principal
leadin/ minor@ | |- .he third principal leadin/ minor@ | |- &t will
continue until the last principal leadin/ minor that is the determinant of the matri8-
&f all these principal leadin/ minors are positi"e a matri8 is in"erti#le and positi"e definite- 9lso
it means that a production "ector P satisfies any demand and the economy is producti"e-
1- E)amples of &roducti'e Economies
Let+s suppose that there is consumptions matri8 9 in an open economy 9C[ ]- We
can chec7 that the sums of the columns are less than '- &t means that the industries require few
inputs to ma7e output and most output will #e sent to satisfy an outside demand-
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& I 9C [ ]- .he first principal leadin/ minor is *-( and it is positi"e- .he second
leadin/ minor is *-(O*-(-*-5O*-(C*-*( and it is positi"e- .he third leadin/ minor is
*-(O*-(O*-(D*-5O*-JO*-7D*-7O*-(O*-5-*-7O*-(O*-7-*-(O*-JO*-5-*-5O*-(O*-(C*-*45 and it is
positi"e num#er- We chec7 that all of principal leadin/ minors are positi"e- 2o we can 7now
that & I 9 is in"erti#le and positi"e #y 0aw7ins-2imons conditions- .herefore it means that it
can meet any demand and the economy is producti"e-
Approaches to Anal%sis: Multipliers
&f there is chan/e in final demand how does it affect to total output or total factor use\$ Multiplier
analysis is widely used to analy,e the impact of chan/es in final demand on total output or total
factor use-
Let+s assume that there is a chan/e in final demand <Rd=- 2o the final demand is chan/ed d to d
D Rd- .he Rd can #e positi"e ,ero or ne/ati"e- We can /et <P D RP= C 9<P D RP= D <d D Rd=
which is sum of PC 9PDd and RP C 9RPDRd- 2ol"in/ for RP we /et RPC<&-9=
-'
Rd-
2ince the matri8 <& I 9=
-'
is positi"e if Rd L * then RP L *- 3ecause industries on an economy
depend on each other the chan/e of final demand of one commodity will cause a chan/e in
output- :or e8ample if there is a positi"e chan/e of final demand of commodity i while all other
final demand of commodities remains same cause increase of production- .herefore all
industries ha"e to increase their production and increase in factor used can #e o#tained-
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!eferences
1) .he Leontief &nput-4utput Model- We#- Retrie"ed from
http@TTwww-personal-psu-eduT7es)ATMichi/an?lassesTmathA'7TWor7sheetsATleontief-pdf
2) Kallem 6icholas- &nput-4utput 9nalysis with Leontief Models- We#- Retrie"ed from
http@TThomeA-f"cc-eduTUdhic7ethTLinear9l/e#raTstudentprojectsTsprin/A**JTnicholas7alle
mTLeontiefVA*project-htm
3) ?hian/ 9lpha- Leontief &nput-4utput Models- We#- Retrie"ed from
http@TTwww-docstoc-comTdocsT'A(5*))*5T:rom-?hapter-5-9lpha-?hian/-:undamental-
Methods-of-Mathematical
4) Euchin :aye- Rensselaer Polytechnic &nstitute- Eepartment of ;conomics- We#-
Retrie"ed from http@TTwww-economics-rpi-eduTwor7in/papersTrpi*J'*-pdf