Projects - Cengage Learning

Appendix C C-91
PROJECT
The Leontief Input-Output Model
Extract of press release from the Royal Swedish Academy of Sciences,
October 18, 1973: The Royal Swedish Academy of Sciences has awarded the
1973 year’s Prize in Economic Science in Memory of Alfred Nobel to
Professor Wassily Leontief for the development of the input-output method
and for its application to important economic problems. Professor Leontief is
the sole and unchallenged creator of the input-output technique. This important
innovation has given to economic sciences an empirically-useful method to
highlight the general interdependence in the production system of a society. In
particular, the method provides tools for a systematic analysis of the complicated
interindustry transactions in an economy.
PART I: Explanation and Practice
Professor Wassily W. Leontief (1906–1999) won the Nobel prize in economics
for his input-output model. In this project we explain the model in a simple
case. As you’ll see, the model yields a system of linear equations that we need
to solve. Leontief began his work on the input-output model in the 1930s and
often applied the model to the economy of the United States. You can see a
readily available example of this at your local or college library in Leontief’s
article “The Structure of the U.S. Economy,” which appears in the April 1965
issue of the magazine Scientific American (vol. 212, no. 4, pp. 25–35).
In the Scientific American article Leontief divided the American economy
into 81 different industries or sectors. (For instance, 5 of the 81 sectors were
coal mining, glass and glass products, primary iron and steel manufacturing,
apparel, and aircraft and parts.) To keep things simple, let’s suppose now that
we have an economy with only three sectors: steel, coal, and electricity. Further,
suppose that the sectors are interrelated, as given by the following input-output
table, Table 1. We’ll explain how to interpret the table in the next paragraph.
TABLE 1
An Input-Output Table for a Hypothetical
Three-Sector Economy
Outputs
Steel Coal Electricity
Inputs
Steel 0.04 0.02 0.16
Coal 0.15 0 0.25
Electricity 0.14 0.10 0.04
The idea behind Table 1 is that each sector in the economy requires for its
production process inputs from one or more of the other sectors. In the table,
the first column of figures (beneath the output heading Steel) is interpreted as
follows: The production of one unit of steel requires
0.04 unit of steel
0.15 unit of coal
0.14 unit of electricity