Outline of a Simple Input-Output Formulation*
Nobel Memorial Lecture, December 11, 1973
WA S S I L Y LE O N T I E F
Harvard University, Cambridge, Massachusetts, USA.
The world economy, like the economy of a single country, can be visualized as a system of interdependent processes. Each process, be it the manufacture of steel, the education of youth or the running of a family household, generates certain outputs and absorbs a specific combination of inputs. Direct interdependence between two processes arises whenever the output of one becomes an input of the other: coal, the output of the coal mining industry, is an input of the electric power generating sector. The chemical industry uses coal not only directly as a raw material but also indirectly in the form of electrical power. A network of such links constitutes a system of elements which depend upon each other directly, indirectly or both.
The state of a particular economic system can be conveniently described in the form of a two-way input-output table showing the flows of goods and services among its different sectors, and to and from processes or entities (“value added” and “final demand”) viewed as falling outside the conventional borders of an input-output system. As the scope of the inquiry expands, new rows and columns are added to the table and some of the external inflows and outflows become internalized. Increasing the number of rows and columns that describe an economic system also permits a more detailed description of economic activities commonly described in highly aggregative terms.
Major efforts are presently underway to construct a data base for a systematic input-output study not of a single national economy but of the world economy viewed as a system composed of many interrelated parts. This global study, as described in the official document, is aimed at “helping Member States of the United Nations make
their 1975 review of world progress in accelerating
development and attacking mass poverty and unemployment.
First, by studying the results that prospective
environmental issues and policies would probably have
for world development in the absence of changes in
national and international development policies, and
* The author is indebted to Peter Petri for setting up and performing all the computations, the results of which are presented in this lecture, and to D. Terry Jenkins for preparing the graphs and editorial assistance.
156 Economic Sciences 1973
secondly, by studying the effects of possible
alternative policies to promote development while at
the same time preserving and improving the environment.
By thus indicating alternative future paths which the
world economy might follow, the study would help the
world community to make decisions regarding future
development and environmental policies in as rational
a manner as possible.“1
Preliminary plans provide for a description of the world economy in terms of 28 groups of countries, with about 45 productive sectors for each group. Environmental conditions will be described in terms of thirty principal pollutants; the use of non-agricultural natural resources in terms of some 40 different minerals and fuels.
The subject of this lecture is the elucidation of a particular input-output view of the world economy. This formulation should provide a framework for assembling and organizing the mass of factual data needed to describe the world economy. Such a system is essential for a concrete understanding of the structure of the world economy as well as for a systematic mapping of the alternative paths along which it could move in the future.
Let us consider a world economy consisting of (1) a Developed and (2) a Less Developed region. Let us further divide the economy of each region into three productive sectors: an Extraction Industry producing raw materials; All Other Production, supplying conventional goods and services; and a...