Using input-output tables in analysis
The following section describes input-output analyses and describes its practical uses.
The Australian Bureau of Statistics (ABS) collects the input-output tables which represent the flow of goods and services between industries. The basic tables and the industry-by-industry tables provided by the ABS are essentially an accounting record of the flows in the national economy. Using simplifying assumptions the input-output estimates can serve many analytical purposes.
Basic structure of input-output tables
The table below describes the basic structure of an industry by industry table with direct allocation of imports. Flows between industries are shown in quadrant 1 (Q1), called intermediate usage. Each column in this quadrant shows the intermediate inputs into an industry in the form of goods and services produced by other industries and each row shows those parts of an industry's output which have been absorbed by other industries. For example, the intersection of the first column (mining) and the third row (construction) indicates how many goods and services are used by the mining industry from the construction sector to produce mining output.
The intermediate usage quadrant and the final demand quadrant (Q2) show the total usage of goods and services supplied by each industry. Quadrants 1 and 3 together show the inputs used to produce the total supply (outputs) of each industry.
Final demand (Q2) represents the total level of demand for products (of industries) by households, business and governments. This includes both consumer and capital goods and services. Also goods and services produced for consumption overseas, exports, are included here.
Primary inputs to production (Q3) includes the proportions of labour, profits, taxes and imports used to produce the total supply of output of each industry. Wages and salaries are the labour component whilst gross operating surplus (GOS) is akin to profit. Taxes include all net government taxes on production. Also included are imports which are used as inputs to production by domestic companies.
As mentioned earlier the table above shows the input-output relationships using direct allocation of imports. Basically imports can be treated in 2 ways, either directly or indirectly. The direct allocation of imports method treats imports as a separate item and imports used as inputs are factored in as a separate line item. That is as they are shown in the table in the last row in primary inputs. In this case quadrants 1 and 2 refer only to the use of domestic production and consequently quadrant 1 does not reflect the technological input structure of the economy. Indirect allocation of imports involves recording all imports as adding to the supply of the industry in quadrant 1. When the tables are depicted in this way the amounts of inputs into one industry supplied by each other industry reflect the true technological relationships between all inputs into the industry.
A simple application of the input-output table is calculating inputs as a percentage of the output of an industry and using these percentages for any given level of output of that industry. In the table above this is done by using quadrant 1 and 3 divided by Australian production in a given industry. The individual results are referred to as direct input-output coefficients.
These coefficients however do not tell the complete story. For example, in order to produce output from the chemicals industry inputs are required directly from the mining industry. To supply this direct requirement, the mining industry itself requires inputs from the chemical industry. To produce this indirect requirement of the mining industry, the chemical industry needs, in turn, additional output from the mining industry and so on in a convergent infinite series. This example is isolated to two industries. When the inter-relationships of all industries in the economy are considered the direct input-output coefficients have major shortcomings. This is not to be confused with the direct allocation of imports which is a separate issue.
What are needed are the total requirements coefficients. This is done by tracing, step by step, throughout the industrial structure, until the increments of output required indirectly from each industry become insignificant. If this operation is carried out for all industries and the direct and indirect requirements are added together, a matrix of total requirement coefficients are obtained. This process is done on a computer using matrix inversion.
In these tables a coefficient at the intersection of row i and column j in quadrant 1 and 3 represents the units of output of industry i required directly or indirectly to produce 100 units of output absorbed by final demand of industry j.