Mathematical Models in Input-Output Economics

Abstract

This paper describes the mathematical basis for input-output economics, the major types of models, and the underlying economic theory. The features of these models that make them especially well suited for understanding the connections between the economy and the environment are emphasized throughout. These include the dual physical and price representations and the representation of resource inputs as factors of production, whether they are priced or not. The basic static physical and price models are described, along with their major properties and associated databases. The most important approaches to analysis involve multipliers, decomposition, and scenario analysis. Going beyond the basic static framework requires the progressive closure of the model by making exogenous variables endogenous while maintaining simplicity, transparency, and the distinctive feature of an input-output model: the simultaneous determination of solutions at the sectoral level and the economy-wide level. Closures for household activities and for investment are described by way of example. The major extensions of the basic model accommodate the representation of pollutant emissions and policies for constraining them, dynamic models, and multi-regional models, the latter including a new version of a world model that solves for bilateral trade flows and region-specific prices based on comparative advantage with factor constraints. The concluding section describes the challenges currently being addressed within the field. An annotated bibliography provides references for further reading and includes both classic articles and a representation of recent research