NIDHI GARG

250/2014
INPUT-OUTPUT ANALYSIS
Input-output analysis seeks to explain how one industry sector affects others in the
same nation or region. The analysis illustrates that the output of one sector can in turn
become an input for another sector, which results in an interlinked economic system.
The analysis is represented as a matrix, where different rows and columns are filled
with values representing the inputs and outputs of various sectors.
It is a technique to explain the general equilibrium of the economy. It is also known as
inter-industry analysis.
The input-output analysis tells us that there are industrial interrelationships and interdependencies 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.
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 crosscurrents 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.
The input-output analysis is the finest variant of general equilibrium. As such, it has
three main elements; Firstly, the input-output analysis concentrates on an economy
which is in equilibrium. 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. The input-output analysis consists of two parts: the
construction of the input-output table and the use of input-output model.
The input-output model relates to the economy as a whole in a particular year. It
shows the values of the flows of goods and services between different productive
sectors especially inter-industry flows.

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
impacts of a given change to the economy. It is also possible to find out from the
input-output table the interrelations among firms and industries about possible trends
towards combinations. The repercussions of a prolonged strike, of a war and of a
business cycle on an industry can be easily understood from the input-output table.
Importance:

Input and output analysis helps identify interrelated industries and helps
an investor to know which industries would move together and thus help
him to identify whether to invest in those industries or refrain from
investing in them. It helps him to see that if an industry is showing progress
then the related industry will also show progress and hence he/she can invest
in the stocks of both the industries whereas if he/she sees that one of the
interrelated industry is not doing well then he/she should not invest in the
other related industry as well since it will also be impacted.
For example: For example coal and steel industry. If steel industry shows a
rise then since coal industry serves as an input to steel industry it would also
benefit from the same and hence the growth would also be seen in the coal

industry.
Risk Diversification- A common diversification approachdiversifying by
industries is made possible by choosing the assets whose underlying industries
have small correlations. Input output analysis helps identify the industries
which are highly correlated. For example, a portfolio consisting of Dell
(computer industry) and Abbott (drug industry) stocks can be considered more
diversified than a portfolio consisting of Dell (computer industry) and

Microsoft (software industry) stocks.

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 and thus we can predict the stock
market movement.