INPUT-OUTPUT MODEL ASSUMPTIONS
Input-Output models hold the following nine assumptions:
CONSTANT RETURNS TO SCALE
The same quantity of inputs is needed per unit of Output, regardless of the level of production (Adams & Stewart, 1956; Christ, 1955; Clouse, et al 2023; MIller & Blair, 2009). In other words, if Output increases by 10%, input requirements will also increase by 10%.
FIXED INPUT STRUCTURE / NO SUBSTITUTION EFFECTS
There is no input substitution in the production of any one Commodity (Adams & Stewart, 1956; Bess & Ambargis, 2011; Christ, 1955; MIller & Blair, 2009). This means that the same recipe of inputs will always be used to create the Output unless changes to the IMPLAN production function are made by the user.
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.
NO SUPPLY CONSTRAINTS
Input-Output assumes there are no restrictions to inputs, raw materials, and employment (Christ, 1955). The assumption is that there are sufficient inputs to produce an unlimited amount of product. It is up to the user to decide whether this is a reasonable assumption for their study area and analysis, especially when dealing with large-scale impacts.
An Industry, and the production of Commodities, uses the same technology to produce each of its products (Guo, Lawson, & Planting, 2002). In other words, an Industry's Leontief Production Function is a weighted average of the inputs required to produce the primary product and each of the by-products, weighted by the Output of each of the products. The technology assumption is used to convert make-use tables (or supply-use tables for some international datasets) into a symmetric Input-Output table. IMPLAN is an Industry Technology Assumption (ITA) model for all Industries which do not have any redefinitions into or out of them. For the Industries which do contain redefinitions, the production functions contain purchases of some Commodities necessary to make the secondary Commodity that has been redefined into it; thereby falling under the Commodity Technology Assumption (CTA).
CONSTANT BYPRODUCT COEFFICIENTS
As a requirement of the technology assumption, Industry byproduct coefficients are constant. An Industry will always produce the same mix of Commodities regardless of the level of production. In other words, an Industry will not increase the Output of one product without proportionately increasing the Output of all its other products.
THE MODEL IS STATIC
No price changes are built in IMPLAN and the underlying data and relationships are not affected by impact runs (Bess & Ambargis, 2011). Input-Output models do not account for general equilibrium effects such as offsetting gains or losses in other Industries or geographies or the diversion of funds from other projects. I-O models assume that consumer preferences, government policy, technology, and prices all remain constant. In IMPLAN, the relationships for a given year do not change unless modified by the user in Region Details.
In Input-Output models, Type I multipliers measure only the backward linkages, also known as upstream effects (Bess & Ambargis, 2011). Input-Output analysis does not look at forward linkages in terms of how an industry’s production is used as an input for other production or for final use, also known as downstream effects.
The length of time that it takes for the economy to settle at its new equilibrium after an initial change in economic activity is unclear because time is not explicitly included in regional I-O models. Some analysts assume the adjustment will be completed in one year because the flows in the underlying industry data are measured over the same length of time. However, the actual adjustment period varies and is dependent on the change in final demand and the related industry structure that is unique to each regional impact study (Bess & Ambargis, 2011). In IMPLAN, the Dollar Year must be specified on the impacts screen. Results can be viewed in any dollar year regardless of the Dollar Year of the Impacts.
Adams, A.A. & Stewart, I.G. (1956). Input-Output Analysis: An Application. The Economic Journal, 66 (263), 442-454.
Bess R. & Ambargis, Z.O. (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. https://www.bea.gov/system/files/papers/WP2012-3.pdf
Christ, C.F. (1955). A Review of Input-Output Analysis. In Input-Output Analysis: An Appraisal (pp. 137-182). Princeton University Press.
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.
Guo, J., Lawson, A.M., & Planting, M.A. (2002). From Make-Use to Symmetric I-O Tables: An Assessment of Alternative Technology Assumptions. Presented at the 14th International Conference on Input-Output Techniques, Montreal, Canada. https://www.bea.gov/system/files/papers/WP2002-3.pdf
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.E. and P.D. Blair. (2009). Input-Output Analysis: Foundations and Extensions, Second Edition. New York: Cambridge University Press.
Written August 30, 2023