Input-Output Analysis
Candlefocus EditorThe direct impact occurs when demand for goods and services from a particular industry or sector directly affects the other sectors in the economy. This direct impact occurs when the only impact of the economic shock is the production of goods and services connected to that sector.
The indirect impact occurs when changes to the supply chain outside of the original economic shock now also have an impact. For instance, if a chocolate factory is closed due to an economic shock, not only will there be a decrease in the demand for chocolate and chocolate-related items, there will also be a decrease in the demand for the packaging materials and ingredients that are used in producing chocolate.
The induced impacts occur when changes to the production or demand of goods and services due to the economic shock leak into the labour market, leading to an increase in income and consumption that have their own impacts upon the economy. For instance, if the chocolate factory was closed and workers were laid off, these former workers may spend the income they received from layoffs to purchase goods and services, creating an induced impact on the economy.
Input-Output Analysis is widely used in both academic and commercial settings, and it helps to illustrate the interconnectedness of the different industries and sectors within an economy. This type of analysis allows economists to better understand the impacts that certain economic shocks can have upon an entire economy, not just upon the industry or sector affected by the shock. For example, a shock to the chocolate industry could have a significant impact upon demand, supply, and labour in other industries and sectors like agriculture, packaging, and transportation.
To summarise, Input-Output Analysis is a powerful tool used to understand the overall impacts of economic shocks and changes. This type of analysis uses an Input-Output Table to understand the direct, indirect, and induced impacts upon the economy. Input-Output Analysis shows the interconnectedness between different industries and sectors and helps explain how economic changes can ripple through an entire economy.