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date: 19 October 2017

Input-Output Models Applied to Environmental Analysis

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Environmental Science. Please check back later for the full article.

Input-Output (I-O) models were originally conceived by the Nobel Prize winner Wassily Leontief in the 1930s as a tool that can be used by economists and economic policy makers to help in their decision process. The I-O models provide a “picture” of the how the economy works, that is, what are the necessities to produce goods and services; how this production generates income, profits and taxes; and how this income is spent. In a simplified way the I-O models can be seen as the model implementation of the economy’s circular flow diagrams usually show in the introductory courses of economics.

Taking, for example, the production of computer screens:

• On the production side, the I-O models have information for the following: (a) how much is spent on the inputs, goods and services, necessary to produce the screens; (b) if these inputs have their origin from the domestic market or were imported; (c) how much was paid in tax to the government; (d) what was the total amount paid in wages and salaries; (e) what were the profits of the producing firms; (f) how many computer screens are sold in the domestic market or in the international market (exported); and (g) if they are sold directly to the final consumer or if they are used as a production input, being incorporated in other goods, for example, like a refrigerator with a computer screen.

• On the demand side, the I-O models, taking into consideration the total income received by the different players in the economy, that is, households, firms, and government, have information about the following: (a) how the income of these players is spent on goods and services, and if they are used for consumption or investment; (b) if these goods and services were produced domestically or abroad (imported); and (c) how much consumer tax was paid.

From the above structure of the I-O models, and using economic mathematical models, it is possible to measure the direct and indirect inputs needed to produce goods and services in the economy, for example, to produce a car, one does not see the need for agricultural goods as a direct input for production, but the fabric used in the car seats or on the car carpets could have come from cotton, which is an agricultural good; as so, cotton is an indirect input used in car production.

The I-O models, by their capability to show a complete picture of the economic system, and of tracing the origin of direct and indirect inputs used in the production process, can be used in environmental studies by linking economic and environmental variables, on the production and consumption sides. From the production side, it is possible to measure, by considering the direct and indirect inputs used, how many natural resources were used and how much pollution was generated on the production of goods and services. On the demand side, it is possible to measure the environmental variables, natural resource, and pollution embodied in the goods and services consumed in the economy. Expanding the I-O models to a global scale, that is, using Inter-Country I-O models, it is possible to measure the environment impacts and contents of the goods and services by countries of the origin of production and by countries of consumption.