In a two - industry economy, it is known that industry 1 uses 20 cents of its ow

Question

In a two - industry economy, it is known that industry 1 uses 20 cents of its own product and 70 cents of II to produce a shillings worth of commodity X and II uses none of its

own product but 40 cents of commodity X in producing a shillings worth of commodity Y.If the open sectors demands 30 and 20 billion shillings of commodity X and Y

Determine the solution of the output level that ensures the input requirements are consistent in the production of commodities X and Y.

What are the weaknesses of applying the input output model in developing countries?

Explanation / Answer

1. There is no mechanism for price adjustments in the input-output analysis which makes it unrealistic. “The analysis of cost-price relations proceeds on the assumption that each industrial sector adjusts the price of its output by just enough to cover the change in the case of its primary and interme­diate output.”

2. The dynamic input-output analysis involves certain conceptual difficulties. First, the use of capital in production necessarily leads to stream of output at different points of time being jointly produced. But the input-output analysis rules out joint production. Second, it cannot be taken for investment and output will necessarily be non-negative.

3. The input-output model thrives on equations that cannot be easily arrived at. The first thing is to ascertain the pattern of equations, then to find out the necessary voluminous data. Equations pre­suppose the knowledge of higher mathematics and correct data are not so easy to ascertain. This makes the input-output model abstract and difficult.

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