For the past ten years, Harvard's Economic Research Project has been perfecting a unique analytical tool developed by Wassily W. Leontief, Henry Lee Professor of Economics. Input-output or inter-industry analysis, as the tool is known, evolved from a search by Leontief for a way to apply economic theory to a factual analysis of the entire national economy.

In Germany during the middle dle twenties, Leontief studied what he considered one of the greatest problems in economics, that of relating abstract theory to actual fact. "Too often," he explained, "one group of people makes the theories while another assembles the facts." His early work was done in "partial theory," by which the market is dissected and sections of it studied. Such problems as the market effect of a change in the price of copper, or an increase in the supply of meat, were tackled by him and his co-workers during these years.

Whole Economy of Interest

The more Leontief studied, however, the more convinced he became that the most interesting problems were not those related to small, isolated parts of the market, but rather those dealing with the economy as a whole. In early 1932, he came to Harvard, a lecturer in Economics, and secured funds from the College for research. By 1935 he had developed the first input-output table of United States industry.

An input-output table is essentially a double-entry chart of all the transactions between different sectors of the economy. It shows for a particular year what each industry supplies to every other industry and to the final consumer. The table is arranged so that each industry, or supplier, appears as a producer down one side of the chart, and again, in the same order, as a consumer along the top.

One of the most important aspects of the analysis is that it allows a detailed study of the sectors of the economy and their effects on each other and on the economy as a whole. It can bring to account every transaction in goods and services. Final demand, which appears down the last right-hand column, is the total of intermediate demands of the industrial sectors, private consumers, government, and overseas customers, plus gross investment. The dollar value of final demand for a particular sector is equal to the sum of the inputs that go into that sector. Inputs are totaled in the columns (up and down), outputs are totaled in rows (left to right). By using a double entry system, the chart is self-checking with total output and total input for each sector resulting in equal dollar values.

The table can be as detailed as necessary. Leontief's original version had only 15 catalogues; the latest U.S. table, made in 1947, by the government, included 450 industries.

Other Products Required

Preparation of the table just described, which shows input-output relations in current money values is only the first step of Leonteif's analysis. The second step is to "invert the matrix," producing a table of coefficients that shows the amounts of every other product required to bring into existance a dollar's worth of any given product.

From this second table forecasts can be made of the effect throughout all industries of a change in demand for the produce of one industry. The statistical computations for "inverting the matrix" are multitudinous and require the solution of so many simultaneous equations that electronic computers must be used. Presently the Research Project is using a Univac and an IBM 650. Calculations on household consumption are being made with M.I.T.'s 704.

Dynamic Table Needed

One of the main limitations of the table is it necessitates (assuming) technological conditions unchanged for the period of the forecast. A large, 450-catagory input-output table takes about two years to complete. This time lag, however, has not proven as serious as critics had predicted. In the United States, calculations based on 1947 figures were found to apply closely to conditions in 1952. Leontief and members of the Project are, however, developing a dynamic model to remove this limitation.

International attention has been attracted by the analytical device. Both advanced economies and underdeveloped countries have adopted Leontief's mode to answer specific questions that are pertinent to them. Underdeveloped countries are primarily interested in it for planning purposes; while advanced economies, particularly in Europe, are employing it to help solve trade balance problems.

Soon after World War II Italy, Holland, and Norway evolved their own charts. In Italy, under the Marshall Plan and private sponsorship, a table was developed to answer questions about the entire Italian economy and to assist in understanding the problems of relatively underdeveloped Southern Italy.

Norway and Holland were largely interested in solving import-export problems, and used the new system along with their national income accounts to see what effect a shift in the trade balance would have on industry. Several South American nations, including Argentina, Peru, Chile, and Equador are also using Leontief's device. Great Britain has employed it for several years.