An input-output model is a way of depicting economic relationships between suppliers and producers in an economy. These models can be used for a number of purposes, including prediction of the profitability of an industry and analysis of the effects of changes in the economy. Both national and regional governments have used input-output models to determine where to allocate government funds and to increase efficiency by determining which industries have the greatest economic effect.
The input-output model was evolved into usable form by Wassily Leontief, a Russian-born economist. He developed a way of converting massive amounts of raw economic data collected by companies and governments into matrixes for easier study. These matrixes could then be manipulated to examine the potential results of price changes, material shortages, and other alterations in the economy. Leontief received the Nobel Prize in economics for this achievement.
Input-output models are usually applied to large scale economic systems but can also be used to analyze individual companies. A closed input-output model consists of a system which receives no external inputs, and all the outputs of the system are consumed within the system itself. Such systems exist but are rare. More common is the open input-output model, which consists of a system that consumes a portion of its own output and sends the rest to some external entity. For example, an oil company may sell most of its gross output to other companies and retain the rest for its own use.
A number of academic concepts are related to input-output models. Economic base analysis studies local economies in relation to their exports by analyzing employment figures. It is based on the premise that a local economy consists of an export-based component and a component which supports the production of those exports. Increasing the number of exports would cause the supporting local economy to grow. The resulting information is used to determine which export industries would provide the greatest local economic growth.
Another related concept is shift-share analysis. Shift-share analysis seeks to understand fluctuations in the employment rates of local economies in relation to the overall national economy and the national state of specific industries. Factoring out the effect of the national economic influences gives a clearer picture of the local economy. This allows the local government to determine how to invest resources in a way that will build up the local economy, instead of trying to influence factors the research indicates they cannot control.