A Note on Input-Output Analysis: Its Uses in Macro-Economics and Micro-Economics.

Abstract A subtle confusion seems to have arisen in some recent attempts to apply the technique of input-output analysis to the activities of the individual enterprise. This is because the analysis was developed originally as an econometric technique for macro-economic purposes. Essentially, econometrics views a system as a black box whose real workings can only be approximated. Thus, national input-output accounts are prepared by dividing the economy into meaningful sectors and attempting to reconstruct the income and expenditure of each sector, in currency terms, analyzed amongst all sectors of the economy. Expressing this data in matrix form and then dividing the various inputs by the total output at selling price of the relevant sector then arrive at so-called technical coefficients. Standard costs are built upwards from the lowest basic operations, while econometric parameters are broken downwards from aggregated material; standard-cost data do purport to illustrate the operation of the system, while econometric parameters are just weightings which happen to explain the right-hand side of the equations in terms of the selected variables.