There are three fundamental principles underlying the I-O accounts (Clouse, et al, 2023; Horowitz & Planting, 2009).
Under this principle, the data compiled from one source are comparable with the data compiled from another source. For example, in accordance with this principle, the estimates shown in the I-O accounts should be consistent with the underlying source data and with the estimates shown in the national accounts. In the United States, NAICS provides a consistent basis for classification that enables comparisons across the broad range of economic statistics. In order to have a balanced Social Accounting Matrix (SAM), there must be a double-entry. This means that one entity purchases goods and services and one sells them.
Under this principle, each Industry's Output is produced with a unique set of inputs or a unique production function. Economic activities of industries are classified by NAICS. While an economic unit can engage in a variety of production activities, it is classified in accordance with the importance of its production activity. I-O models typically assume that all firms within an industry are characterized by a common production process. If the production structure of the initially-affected local firm is not consistent with the average relationships of the firms that make up the industry in the I-O accounts, then the impact of the change on the local economy will differ from that implied by a regional multiplier (Bess & Ambargis, 2011). In IMPLAN, edits can be made to the production function of an industry in order to model a distinct firm.
Under this principle, all inputs consumed by an I-O industry are a linear function of the level of Output. That is, the inputs consumed vary in direct proportion to Output and there are no economies of scale. The same quantity of inputs is needed per unit of Output, regardless of the level of production (Adams & Stewart, 1956; Christ, 1955; Miller & Blair, 2009). In other words, if Output increases by 10%, input requirements will also increase by 10%.
Adams, A. & Stewart, I. (1956). Input-output analysis: An application. Economic Journal, 6 (263): 442–454.
Bess, R. & Ambargis, Z.(2011). Input-Output Models for Impact Analysis: Suggestions for Practitioners Using RIMS II Multipliers. Presented at the 50th Southern Regional Science Association Conference, New Orleans, Louisiana.
Christ, C. (1955). A Review of Input-Output Analysis. In Input-Output Analysis: An Appraisal. Princeton University Press, New York.
Clouse, C., Thorvaldson, J. & Jolley, G.J.. 2023. Impact Factors: Methodological Standards for Applied Input-Output Analysis. Journal of Regional Analysis & Policy 53 (2): 1–14.
Horowitz, K.J. & Planting, M.A. (2009). Concepts and Methods of the U.S. Input-Output Accounts. Bureau of Economic Analysis, US Department of Commerce. https://www.bea.gov/sites/default/files/methodologies/IOmanual_092906.pdf
Miller, R. & Blair, P. (2022). Input-Output Analysis Foundations and Extensions (ThirdEdition). Cambridge University Press, Cambridge.
Written August 30, 2023