Input-output is a novel technique that is used to analyze inter-industry relationship in order to understand the inter-dependencies and complexities of the economy and thus the conditions for maintaining equilibrium between supply and demand. It is also known as "inter-industry analysis."
Meanings:
Before analyzing the input-output method, let us understand the meaning of the terms, "input" and "output". An input is "something which is bought for the enterprise" while an output is "something which is sold by it". An input is obtained but an output is produced. Thus input represents the expenditure of the firm, and output its receipts. The sum of the money values of inputs is the total cost of a firm and the sum of the money values of the output is its total revenue.
The input-output analysis tells us that there are industrial interrelationships and inter-dependencies in the economic system as a whole. The inputs of one industry are the outputs of another industry and vice versa, so that ultimately their mutual relationships lead to equilibrium between supply and demand in the economy as a whole Coal is an input for steel industry and steel is an input for coal industry, though both are the outputs of their respective industries. A major part of economic activity consists in producing intermediate goods (inputs) for further use in producing final goods (outputs). There are flows of goods, in "whirlpools and cross currents" between different industries. The supply side consists of large inter-industry flows of intermediate products and the demand side of the final goods. In essence, the input-output analysis implies that in equilibrium, the money value of aggregate output of the whole economy must equal the sum of the money values of inter-industry inputs and the sum of the money values of inter-industry outputs.
Main Features:
The input-output analysis is the finest variant of general equilibrium. As such, it has three main elements: First, the input-output analysis concentrates on an economy which is in equilibrium. It is not applicable to partial equilibrium analysis. Secondly, it does not concern itself with the demand analysis. It deals exclusively with technical problems of production. Lastly, it is based on empirical investigation.
Assumptions:
This analysis is based on the following assumptions:
(i) The whole economy is divided into two sectors - "inter-industry sector" and "final demand sector," both being capable of sub-sectoral division.
(ii) The total output of any inter-industry sector is generally capable of being used as inputs by other-inter-industry sectors, by itself and by final demand sectors.
(iii) No two products are produced jointly. Each industry produces only one homogeneous product.
(iv) Prices, consumer demands and factor supplies are given.
(v) There are constant returns to scale.
(vi) There are no external economies and diseconomies of production.
(vii) The combinations of inputs are employed in rigidly fixed proportions. The inputs remain in constant proportion to the level of output. It implies that there is no substitution between different materials and no technological progress. There are fixed input coefficients of production.
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