Input–Output Models Applied to Environmental Analysis
Authors: Guilhoto Joaquim J.M. 
Published: September 2017

Input–Output (I–O) models and analysis 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 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 circular-flow diagrams usually shown in economics introductory courses. Associated with the theory behind I–O models and analysis, I–O tables contain the empirical information necessary to implement these models and theory.

Taking, for example, the production of computer screens:

• On the production side, the I–O models have information on: (a) how much is spent on the inputs, goods and services necessary to produce the screens; (b) whether these inputs have their origin in the domestic market or are 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 on the domestic market or on the international market (exported); and (g) whether they are sold directly to the final consumer or are used as a production input, that is, incorporated into other goods, for example, 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 on: (a) how the income of these players is spent on goods and services, and whether it is used for consumption or investment; (b) whether these goods and services were produced domestically or abroad (imported); and (c) how much consumer tax was paid.

From the aforementioned structure of 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 there is no 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, so, cotton is an indirect input used in car production.

I–O models, by their capability to show a complete picture of the economic system, and tracing of 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 in producing the goods and services. On the demand side it is possible to measure the environmental variables, natural resources, and pollution, embodied in the goods and services consumed in the economy. Expanding I–O models to a global scale, that is, using inter-country I–O models, it is possible to measure the environmental impacts, and contents, of the goods and services by country of origin of production and by countries of consumption.