MENTAL MODEL · M9864

Input-Output Model

BusinessHigh supportEconomics

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Updated 2026-08-15

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INTRODUCTION

English translation pending.

CORE DEFINITION

The input-output model was developed by Wassily Leontief, who received the Nobel Prize for the work. It records each industry's purchases from every other industry and its sales to final demand in a transactions table, and from that table derives the direct consumption coefficients that describe how much of each input a sector needs per unit of output. The core proposition is that the economy is a web of interdependencies, and that the Leontief inverse matrix lets one compute how a change in final demand propagates through every sector. The key qualification is that the coefficients are assumed fixed, so the model captures structure at a moment in time and misses substitution and technical change.

SCAFFOLDING EFFECT

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- Map The Dependencies: build the transactions table showing who buys from whom. - Compute The Ripple: apply the inverse matrix to see how a demand change touches every sector. - Read The Structure: use the coefficients to find which sectors are bottlenecks or hubs.

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Every sector consumes the outputs of other sectors as inputs, so an order for steel becomes orders for iron ore, transport and electricity, and each of those becomes further orders in turn. The transactions table records these flows, and the derived coefficient matrix turns them into a multiplicative structure, whose inverse gives the total, direct plus indirect, requirement per unit of final demand. Because the propagation is multiplicative, small final-demand changes can arrive at distant sectors magnified, which makes the model useful for tracing a policy's true footprint.

MINIMUM ACTION

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Practice this model in one real situation:

Compile the transactions table showing each sector's purchases and sales. 2. Divide by sector output to obtain the direct consumption coefficients. 3. Invert the coefficient matrix to obtain the full requirement matrix. 4. Apply it to a change in final demand and read the effect on each sector. 5. Note the assumptions and re-run the model when technology or prices shift materially.

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Source support: Explicit

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en.wikipedia.orghttps://en.wikipedia.org/wiki/Input%E2%80%93output_modelZH · Explicit
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