Input–Output Analysis

The structure of an economy can be represented in terms of the purchases and sales relationships between firms, aggregated into similar sectors based on the nature of the goods and services that they produce. This accounting system can be transformed into a model from which it is possible to derive the multiplier or ripple effects associated with each of these transactions. Further manipulation of the model allows estimation of key sectors, those sectors whose change generates an above-average impact on the economy. The model can also be used to compare the economic structure of an economy – over time or across economies at one point in time; this is accomplished by the creation of the multiplier product matrix. More extensive models have now been developed in which the input–output system is embedded; these include computable general equilibrium models in which both supply and demand signals are embraced within one modeling framework.