Michael Plecinski- Section 301

Leontif Economic Models

Introduction:
After just being hired by the department of commerce, our team of young economists was asked to do an
analysis of several different industries and their interdependence on one another. We decided it would be best if we
used the Leontief input-output model. Even though the Leontief input-output model is a toy model, it can still give
us valuable insight on the interdepenency of industries. Our first job was to do an analysis on the interdependency
of the electricity and transportation industries. Next, we looked at the interdependency of five industries. After
which, we decided to look into international trade with Bortzania and Curtisburg and whether it would be feasable
or not. Lastly, we attempted to develop our toy model further by incorporating Moores Law and seasonal depen-
dence into the price of goods.
Electricity and Transportation Interdependence:
The department of commerce was trying to determine how much electricity and transportation should be
produced to meet both the demands of the people as well and fuel the respective industries. We know from the
Leontif Model that total output is equal to the external demand and the internal consumption. That is, the total
production of electricity and transportation is equal to the amount of transportation and electricity demanded of the
people plus the amount of transportation and electricity required in production. We can write this model simply as:
x d A x (Leontif input-output model)
In this case, the vector d, the external demand, is going to be a real-valued vector in
2
. The first element
of the vector will be the external demand of electricity and the second component of the vector will be the external
demand of transportation. The vector x, the total output, is also going to be a real-valued vector in
2
. For x, the
first element of the vector will be the output of electricity and the second element of the vector will be the output of
transportation. The matrix A will be a 2x2 matrix in
2 x2
representing the amount of each industry to produce
each industry. The first thing we did to simplify solving this model was to solve for x. By subtracting Ax from each
side, we get x A x d. Then, we pull and x out to get I A x d. Finally, we multiplied each side by the
inverse of (I-A) to obtain:
x I A
1
d (Simplified Leontif input-output model)
Next, we took data from the electric companies and transportation companies and determined that for every
$1.00 in electricity produced, the electric companies consumed $0.50 worh of electricity and $0.30 of transporta-
tion. Likewise, for every $1.00 of transportation produced, the transportation industry consumed $0.09 of trans-
portation and $0.30 of electricity. By creating a matrix with the cost associated with production of each product,
we created the matrix A, where:
A =
0.50 0.30
0.30 0.09
(Cost of Production, in dollars)
Where, each element can be read A
XY
as the amount of X required to produce 1 of Y. For example,
A
ET
can be thought of as the amount of electricity required to produce one unit of transportation.
Where, each element can be read A
XY
as the amount of X required to produce 1 of Y. For example,
A
ET
can be thought of as the amount of electricity required to produce one unit of transportation.
A =
A
EE
A
ET
A
TE
A
TT
(Map of Matrix A)
Also, we know the external demand of electricity was $500 and the external demand for transportation was
$600. Using this, we created our demand vector d, where:
d =
500
600
(External Demand, in dollars)
Now, by plugging A and d into our simplified Leontif input-output model, we get:

x
1
x
2
=
Total Production of Electricity
Total Production of Transportation
=
1739.7
1232.9
(Solution to Total Production,
in dollars)
So, we must produce $1739.7 of electricity and $1232.9 of transportation to fill the external demand and
the internal consumption.
Expanding the Model to Five Industries:
The department of commerce was impressed with our model so much that they asked us to expand the
model to include five industries. The five industries we will look at are electricity, trucks, widgets, computers and
human power. We gathered data from the five industries to create a matrix. We will map the matrix accordingly.
Again, read A
XY
as the amount of X required to produce 1 of Y. E stands for electricity, T for trucks, W for
widgets, C for computers and H for human power.
A =
A
EE
A
ET
A
EW
A
EC
A
EH
A
TE
A
TT
A
TW
A
TC
A
TH
A
WE
A
WT
A
WW
A
WC
A
WH
A
CE
A
CT
A
CW
A
CC
A
CH
A
HE
A
HT
A
HW
A
HC
A
HH
(Map of Matrix A)
Using our data to create a matrix, we came up with the matrix A, where:
A =
0.1 0.15 0.23 0.23 0.05
0.1 0.2 0.2 0.01 0.1
0.05 0.25 0.05 0.01 0.1
0.02 0.17 0.1 0.13 0
0.15 0.2 0.15 0.1 0.15
(Internal Consumption)
From the economic data we collected, we also noted that the world demand for each product was 1000
units of electricity, 2000 units of trucks, 3000 widgets, 4000 units of computers, and 5,000 units of human power.
Note that one unit of human power is equal to 100 employees. This corresponds to a demand vector d:
d =
1000
2000
3000
4000
5000
(External Demand)
Pluging our matrix A and our vector d into our Leontif input-output model, we get the total production
vector x:
x =
Production of electricity
Production of Trucks
Production of Widgets
Production of Computers
Production of Human Power
=
6014.8
6184.7
6255
6663.4
10 287
(Total Production)
So, to meet external demand and internal consumption, we must produce 6014.8 units of electricity, 6184.7
units of trucks, 6255 widgets, 6663.4 units of computers, 10287 units (hundreds of) human power.
2 APPM2360LAB2.nb
So, to meet external demand and internal consumption, we must produce 6014.8 units of electricity, 6184.7
units of trucks, 6255 widgets, 6663.4 units of computers, 10287 units (hundreds of) human power.
While doing this, we noticed that our matrix, I A
1
, is non-singular. Non-singular refers to the matrix
being invertable because it has full column rank and full row rank (i.e., the determinant is non-zero). Because our
matrix is non-singular, there is a unique solution for every I A
1
d = x as long as our vector d is an element of

5
. Thus, we can meet any demand the world might require.
International Trade:
Using our original data for electricity and transportation industries, the department of commerce asked us
to do an analysis of international trade with Bortzania and Curtisburg. However, recently congress cut subsidies to
the transportation industry and now the cost to produce $1.00 of transportation costs $0.82 of transportation. So,
our original matrix A has now changed to:
A =
0.50 0.30
0.30 0.82
(Cost of Production)
Again, each entry can be read as A
ET
meaning the amount of electricity required to produce one unit of
transportation.
A =
A
EE
A
ET
A
TE
A
TT
(Map of Matrix A)
Now, Bortzania is a monrach and as a result their economy is not nearly as developed which gives our
country an absolute advantage. Because Bortzania is stuck in its archaic ways, their king is demanding $10,000 in
electricity and $20,000 in transportation to save their country. Curtisburg has developed a sophisticated economy
and as a result, Curtisburg has a competititve advantage in producing transportation. El Jefe of Curtisburg pro-
poses to give us $60,000 of transportation and in return he wants $100,000 of electricity. We can create external
demand d for each country.
d
Bortzania
=
10 000
20 000
(Demand of Bortzania, in dollars)
d
Curtisburg
=
100 000
60 000
(Demand of Curtisburg, in dollars)
Using our matrix A and our demand vector d for Bortzania, we run into a problem. Our matrix I A is
singular, meaning non-invertable. So, we can no longer solve the system x I A
1
d. Now, we have to use row
reduction to solve for x using the system I Ax=d. For Bortzania, when we do row reduction, we get an inconsis-
tant sytem. Thus, meeting Bortzanias demands is impossible. The reason that is impossible is because the column
sum of our matrix A is greater than one. This means it requires more than one units worth of inputs to produce
one unit of output. Unfortuantely, we can not produce the electricity and the transportation that the King of Bortza-
nia is demanding of us.
However, we can agree to the trade terms with el Jefe of Curtisburg. Because he is giving us transportation
in exchange for electricity, we do not run into the same problem that we encountered with Bortzania. Row reducing
this sytem gives us a free variable making this trade possible quite possible.
The Effect of Technology:
The Depeartment of Commerce asked our group to estimate future prices of two industries, X and Y. At
first, we created the matrix A to accurately reflect the current cost of production of X and Y:
A =
0.3 0.2
0.3 0.1
(Internal Consumption for X and Y, in dollars)
APPM2360LAB2.nb 3
Again, we use a similar map to our previous models.
A =
A
XX
A
XY
A
YX
A
YY
(Map of Matrix A)
However, looking at data from previous years we noticed the amount of X to produce Y decreases as
technology increases.
Pricet
Price0
Technologyt
(Price at time t)
Where Price(0) is the current cost of X to produce Y, and Price(t) is the cost of X to produce Y at time t,
where t is in days, and Technology(t) is the level of technology at time t, where t is in days.
Other economists did the regression analysis and came to the conclussion that the level of technology
doubled every ten years. So, to accurately estimate the amount of X to produce Y, we came up with:
Pricet
0.2
e
ln2t
3650

0.2
2
t
3650
(Cost of X to produce Y, in dollars)
While analyzing the data corresponding to the price of Y to produce X, we noticed the price of Y to
produce X fluctuates periodically throughout the year. We realized that there was a seasonal dependence of the
cost of Y to produce X. Other economists noted that the cost of Y to produce X changes with the amount of
daylight, and the cost of Y to produce X is greater in the winter, when there is less day light. The function for price
that they came up with was:
Pricet 0.3 cos2 365 t (Cost of Y to produce X, in dollars, where t is in days)
Now, our matrix A is dependent on time t, so we get:
At
0.3
0.2
2

t
3650

0.3 cos
2 t
365
0.1
(Cost of Production, where t is in days)
Again, we use the same map as our model above.
A =
A
XX
A
XY
A
YX
A
YY
(Map of Matrix A)
The market for X and Y will not see an increase in demand in the foreseable future, so we assume demand
will stay at its current level which is 150 units of X and 175 units of Y. That is, the products X and Y are perfectly
inelastic goods. Using these values, we can make our demand vector d:
d =
Demand of X
Demand of Y
=
150
175
(External Demand, in dollars)
Plotting the production of X with respect to time we get the graph:
4 APPM2360LAB2.nb
500 1000 1500 2000 2500 3000 3500
Time t, in days
240
250
260
270
280
290
Production of X, in dollars
Production of X vs. Time
From this graph, we can see that the production of X in dollars decreases at time goes on and fluctuates
sinusoidally throughout the year.
Plotting the production of Y with respect to time we get the graph:
500 1000 1500 2000 2500 3000 3500
Time t, in days
150
200
250
Production of Y, in dollars
Productionof Y vs. Time
From this graph, we can see that the production of Y in dollars fluctuates sinusoidally throughout the year
due to seasonal dependency, however, improvements in technology does not have nearly as much of an effect as the
production of X.
We decided to look at the long term production of X as t gets really large, the total cost of production
behaves as:
5000 10 000 15 000
Time t, in days
220
240
260
280
300
Production of X, in dollars
Productionof X vs. Time
As we can see, after many years, the impact of seasonal dependency decreases. Also, increases in technol-
ogy drives the total cost of production closer and closer to the limit of the function which is $214.29.
Also, looking at the long term total cost of production of Y as t gets really lagre, the total cost of production
behaves as:
APPM2360LAB2.nb 5
5000 10 000 15 000
Time t, in days
150
200
250
Production of Y, in dollars
Productionof Y vs. Time
From the graph, we can tell the total cost of production of Y is very much effected by seasonal dependence.
Also, it is not impacted as much by technologial advances. The limit of the function that determines the production
of Y never converges and oscilates forever.
Overview of the Model:
This model is great for looking at the interdependencies of industries and sectors of commerce. After all,
the interrelations betweens the sectors are very complex and the Leontif Model gives us a way to see how various
sectors are connected. It can also show the basic ways production is required to meet consumers needs. However,
in realitiy this simple toy model breaks down because of the complexity of the world economy. The first thing this
model does is assumes there is absolutely no substitutes. For example, perhaps in the production of trucks, gadgets
could be substituted for widgets if it would make production more effecient. Also, this model assumes prices are
linear. For example, in the very first part where we talk about transportation and electricity. As we increase the
production of transportation, transportation will demand more and more electricity for its production. With the
increase in demand for electricity, realistically, the price of electricity will increase. However, we have the price of
electricity fixed for the production of transportation regardless of how much transportation we produce.
This model can be expanded far beyond our simple models. This model can be used to balance trade
relations between countries. Like we did with Bortzania and Curtisburg, except exapanded much more to include
more countries and more goods. This could easily show how countries should utalize competitive advantages and
optimize their economic growth.
Conclussion:
The Leontief input-output model allows us to look at interdependencies between industries, sectors of
commerce, and nations. Using the Leontief input-output model, we were able to calculuate the amount of electricity
and transportation to produce to meet the demand. Also, we were able to expand the model to include five indus-
tries and calculate their interdependency on one another. After, we analyzed potential trade with two different
countries. Finally, we were able to extrapolate future prices of two products by looking at trends in the develop-
ment of technology and seasonal dependence.
This model is an incredibly powerful tool to measure how industries rely on one another. This lab teaches
us we can use simple systems of matrices to analyze real world issues. By using the knowledge we gained from this
lab, we can now formulate problems that may seem incredibly complex by applying matrix methods.
6 APPM2360LAB2.nb
Appendix:
Section 4
A[t_]
1 0.3
0.2
2
_
t
3650
_
0.3 Cos]
2 t
365
1 0.1
;
d _
150
175
_;
time LinearSolve[A[t], d];
Plot][1.` [35.` 135.` 2.`
0.000273972602739726` t

1.7763568394002505`*^-15 Cos[0.01721420632103996` t]|| /

[0.63` 2.`
0.000273972602739726` t
0.06` Cos[0.01721420632103996` t]|,
{t, 0, 3650}, AxesLabel {"Time t, in days", "Production of X, in dollars"},
PlotLabel "Production of X vs. Time"
500 1000 1500 2000 2500 3000 3500
Time t, in days
240
250
260
270
280
290
Production of X, in dollars
Productionof X vs. Time
Plot](1.` (122.49999999999999` 45.` Cos[0.01721420632103996` t])) /
[0.63` 0.06` 2.`
0.000273972602739726` t
Cos[0.01721420632103996` t]|,
{t, 0, 3650}, AxesLabel {"Time t, in days", "Production of Y, in dollars"},
PlotLabel "Production of Y vs. Time"
500 1000 1500 2000 2500 3000 3500
Time t, in days
150
200
250
Production of Y, in dollars
Productionof Y vs. Time
APPM2360LAB2.nb 7
Plot][1.` [35.` 135.` 2.`
0.000273972602739726` t

1.7763568394002505`*^-15 Cos[0.01721420632103996` t]|| /

[0.63` 2.`
0.000273972602739726` t
0.06` Cos[0.01721420632103996` t]|,
{t, 0, 18 250}, AxesLabel {"Time t, in days", "Production of X, in dollars"},
PlotLabel "Production of X vs. Time"
5000 10 000 15 000
Time t, in days
220
240
260
280
300
Production of X, in dollars
Productionof X vs. Time
Plot](1.` (122.49999999999999` 45.` Cos[0.01721420632103996` t])) /
[0.63` 0.06` 2.`
0.000273972602739726` t
Cos[0.01721420632103996` t]|,
{t, 0, 18 250}, AxesLabel {"Time t, in days", "Production of Y, in dollars"},
PlotLabel "Production of Y vs. Time"
5000 10 000 15 000
Time t, in days
150
200
250
Production of Y, in dollars
Productionof Y vs. Time
Limit][1.` [35.` 135.` 2.`
0.000273972602739726` t

1.7763568394002505`*^-15 Cos[0.01721420632103996` t]|| /

[0.63` 2.`
0.000273972602739726` t
0.06` Cos[0.01721420632103996` t]|, t Infinity
214.286
Limit][1.` [35.` 135.` 2.`
0.000273972602739726` t

1.7763568394002505`*^-15 Cos[0.01721420632103996` t]||, t Infinity

8 APPM2360LAB2.nb