NIDHI GARG250/2014INPUT-OUTPUT ANALYSISInput-output analysis seeks to explain how one industry sector affects others in the same nation or region. The analysis illustrates that the output of one sector can in turn become an input for another sector, which results in an interlinked economic system. The analysis is represented as a matrix, where different rows and columns are filled with values representing the inputs and outputs of various sectors.It is a technique to explain the general equilibrium of the economy. It is also known as inter-industry analysis.The input-output analysis tells us that there are industrial interrelationships and inter-dependencies in the economic system as a whole. The inputs of one industry are the outputs of another industry and vice versa, so that ultimately their mutual relationships lead to equilibrium between supply and demand in the economy as a whole.A major part of economic activity consists in producing intermediate goods (inputs) for further use in producing final goods (outputs).There are flows of goods in whirlpools and crosscurrents between different industries. The supply side consists of large inter-industry flows of intermediate products and the demand side of the final goods. In essence, the input-output analysis implies that in equilibrium, the money value of aggregate output of the whole economy must equal the sum of the money values of inter-industry inputs and the sum of the money values of inter-industry outputs.The input-output analysis is the finest variant of general equilibrium. As such, it has three main elements; Firstly, the input-output analysis concentrates on an economy which is in equilibrium. Secondly, it does not concern itself with the demand analysis. It deals exclusively with technical problems of production. Lastly, it is based on empirical investigation. The input-output analysis consists of two parts: the construction of the input-output table and the use of input-output model.The input-output model relates to the economy as a whole in a particular year. It shows the values of the flows of goods and services between different productive sectors especially inter-industry flows.Instead of assuming a change in a basic sector industry having a generalized multiplier effect, the IO approach estimates how many goods and services from other sectors are needed (inputs) to produce each dollar of output for the sector in question. Therefore it is possible to do a much more precise calculation of the economic impacts of a given change to the economy. It is also possible to find out from the input-output table the interrelations among firms and industries about possible trends towards combinations. The repercussions of a prolonged strike, of a war and of a business cycle on an industry can be easily understood from the input-output table.

Importance: Input and output analysis helps identify interrelated industries and helps an investor to know which industries would move together and thus help him to identify whether to invest in those industries or refrain from investing in them. It helps him to see that if an industry is showing progress then the related industry will also show progress and hence he/she can invest in the stocks of both the industries whereas if he/she sees that one of the interrelated industry is not doing well then he/she should not invest in the other related industry as well since it will also be impacted.For example: For example coal and steel industry. If steel industry shows a rise then since coal industry serves as an input to steel industry it would also benefit from the same and hence the growth would also be seen in the coal industry. Risk Diversification- A common diversification approachdiversifying by industries is made possible by choosing the assets whose underlying industries have small correlations. Input output analysis helps identify the industries which are highly correlated. For example, a portfolio consisting of Dell (computer industry) and Abbott (drug industry) stocks can be considered more diversified than a portfolio consisting of Dell (computer industry) and Microsoft (software industry) stocks. The central advantage of Input-Output analysis is that it tries to estimate these inter-industry transactions and use those figures to estimate the economic impacts of any changes to the economy and thus we can predict the stock market movement.