As I understand it, each row (equation) in an input-output table represents the total output of an industry Xi and the entries in that row represent the amounts of Xi’s output used by all industries (including Xi itself) as well as "final demand." Final demand is typically disaggregated into consumption, investment, government, and exports. I find this confusing because “investment” and parts of “government” pertain to the supply side of the economy, so why are those portions of Xi’s output not included in the industrial entries listed in the equation prior to final demand?
Hi Brian,
The difference here is how the output gets used. For government, indeed parts of their output is used to produce other goods. Analysis on weather and soil is a services often produced by the government for the agriculture sector. This is often included as a "government" sector intermediate good in IO tables. However, much of government production is a "final good" in that it is not directly used in the production of another good. For example, a school is labor (teachers) and capital (buildings/land) combined with intermediate goods (various) to produce a final good - education. That education is a final good because is not used to produce any other goods during that time period.
Investment is considered a final good because it is not used for production until a new time period. For example, consider a tower being built in a city. The tower is built this year and then used next year. This year it is produced as a final good - it is not used in the production of anything else. Next year it is is added to the capital supply. It can now be used to produce more goods such as apartments (final good), or intermediate goods (such as office space). Hope this helps Kenneth
Thank, you Kenneth, that answer my question clearly and completely.
Leontief defines the method as follows: Input-Output Table it shows the goods and services flows within a period of one year, for example. Input-output analysis of the existence of mutual interaction and delivery of different economic sectors (output) and acquisitions (input). Leontief also to provide a certain yield of goods (output), which amounts of production factors (input) tried to find the answer to the question should be used
A reference to what happens in macroeconomics might also be useful. In short-run models (gross) investment is a typical component of aggregate demand. In the long-run models of growth theory (net) investment contributes to the growth of capital stock.
Good morning. Kenneth Castellanos ansered the question. I just wish to comment on a related topic.
Investment is in Final Demand because it is used to build the stock of capita, while the inter-industry part of the input-output table deals only with flows (inputs that “disappear “ in the production process. But one may consider that a small share of the capital stock is used (“consumed” or “destroyed”) during production and needs to be replaced by fresh investment to keep the stock constant.
This is usually taking care of by adjusting the Value-Added component: part of the remuneration of capital will be set aside to constitute a depletion reserve. In this case, the Domestic Product is no more Gross, but Net. Similarly, one may adjust for the depletion of non-renewable natural resources (in mining and other extractive industries).
Because it depends of the type of expenditure. If a government spends money buy drugs to hospitals that is an intermediate consumption. However, if the government buys drugs and distributes directly to the consumer that is final consumption. In terms of investment, the answer of Huberth Escaith was pretty clear :)
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