Linear Algebra and Economics

Steve Levandusky

Input-Output Analysis

             Input-output analysis is the method of quantifying the connections amongst the various sectors of an economy. Whether the economic system is as big as a nation or as small as a single business, the approach is essentially the same. A vector is defined by the structure of each sector’s production process in terms of the relationship between the inputs needed and the outputs produced. A set of linear equations expresses the connection between sectors of the economy. This set of linear equations can conveniently be expressed by a matrix of coefficients. [2]

             For example, electricity is used as an input of production of many goods but is also a final product. The Leontief input-output model provides a way to track the interaction electricity has with other goods. [1]

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