Input-Output Model, Linear Programming | UGC NET Economics – Notes

Introduction

The Input-Output Model, developed by the economist Wassily Leontief, for which he was awarded the Nobel Prize in Economics in 1973, is an analytical framework designed to represent and analyse the interdependence among different sectors (industries) of an economy. The model captures the fact that the output of one industry frequently serves as an input into the production processes of other industries, and it provides a systematic method, grounded in matrix algebra, for tracing the ripple effects of changes in final demand throughout the entire economic system. The model is extensively used in economic planning, regional economics, and forecasting, and was of particular historical importance in India’s Five-Year Plans, where it was employed to determine sectoral output targets consistent with given development objectives.

Basic Assumptions of the Model

The Leontief input-output model rests upon several simplifying assumptions. It assumes that each industry produces only a single homogeneous output using a fixed proportion of inputs, meaning there is no substitution between inputs in the production process. It further assumes constant returns to scale, meaning that the input requirements per unit of output remain unchanged regardless of the scale of production, and it assumes that the total output of each industry is used either as an intermediate input into other industries or as final demand (consumption, investment, government expenditure, exports). The model further assumes a static, closed system for a given period, with no changes in production technology during that period.