What is an Input-Output Analysis?

An input-output analysis is a strategy within behavioral economics that seeks to understand and qualify the impact of activity in one business sector on other sectors within the same general economy. This approach can be used to evaluate the economic connections within a local economy, a national economy or even the world economy. An analysis of this type can also be used to identify the impact of the actions of one company on other companies that function in the same industry.

The general concept for an input-output analysis was developed by Wassily Leontief, who later received the Nobel Memorial Prize in Economic Sciences for his work in defining the concept and developing the model that is still used today to illustrate the findings that result from the analysis. Demonstrating how various industries depend on other industries to produce the raw materials they need, it is possible to use a simple matrix to demonstrate how production levels in one industry can have a positive or a negative effect on a connected industry. At the same time, the input-output analysis can demonstrate how those changes within an industry or group of industries can either support growth within an economy or undermine the stability of that economy, triggering an economic crisis.

A classic example of an input-output analysis begins with the production of goods in one industry that are necessary to support the production of goods in another industry. For example, coal must be mined in order to provide materials for the production of steel. If adverse conditions weaken the coal industry to the point that mining operations are reduced, the steel industry must find some way to compensate for that reduced production in order to avoid a reduction in the creation of steel. Since the actual tonnage of coal that goes into the steel industry results in a lower amount of tonnage of steel material, the input-output analysis allows for the difference and makes it easy to determine just how much of an effect the change in coal production ultimately has on steel production.

Economists as well as national governments often utilize the input-output analysis model to project the impact of some change in industries that have some type of interconnection. Doing so makes it possible to determine if those changes will create any short-term economic effects that are not desirable, and even if the changes could trigger a chain of events that would lead to a recession or other type of economic crisis. By using the input-output analysis to accurately project how the changes will affect the economy, it is possible to use government based initiatives to either support those changes and the ensuing events, or find ways to minimize the impact of those changes and avoid some sort of economic downturn.