How to Use the Input-Output Model in an Economic Crisis

In the video below, an Emsi specialist describes the dos and don’ts of the Input-Output model. This model provides insight into the ripple effects caused by sales revenue gained or lost across various industries. Though sales revenue is the base unit, you can convert the revenue into jobs or earnings to see the impact in those areas as well.

During a period of economic uncertainty, this insight can be used to project various scenarios before they’ve happened. However, there are a few precautions to keep in mind; for example, this model is structured to show a fixed economy, meaning that it does not take into account factors such as timeframe, politics, or a global pandemic. 

Read on for a summary of the video, or watch the video at the bottom of the page. 

Video Summary

What is the Input-Output model? A model that describes an area’s industries and the money that flows between them, taking into account civilian and government spending, taxes, etc. 

Terminology: 

• Initial Effect: The basic shock to the economy that occurs as a direct result of the change.
• Direct Effect: The impact on the industry’s supply chain.
• Indirect Effect: The subsequent ripple effect in further supply chains resulting from the direct change. In more awkward terms, this shows the sales change in the supply chains of the supply chain, as a result of the direct change. This is the sum of the second and subsequent rounds of impact (see Direct Effect). This change is due to inter-industry effects.
• Induced Effect: This change is due to the impact of the new earnings, investment, and government created by the initial, direct, and indirect changes. Induced effects enter the economy as employees spend their paychecks in the region, businesses invest to grow their operations, and government spends more to support the changes.

Types of Models:

Type 1: Shows industry to industry transactions, but doesn’t use induced effect. Best for large scale instances, such as dealing with the nation as a whole or broad areas of the US that are mostly self-sufficient. 

Type 2: Type 1 model + household spending. Best used for state and smaller regions when looking at shorter term scenarios that are not likely to factor in amortized investment and government. 

Type Emsi (featured in Emsi tools) Type 2 model + additional amortized investment and government spending. Best used for long-term regional scenarios.

Things to Remember About the Model: 

• The Input-Output model has no associated timeframe and is designed to reflect a stable economy. Therefore, the impacts of COVID-19, such as sudden layoffs and pay cuts or surges in specific industries as a response to / result of the virus, are not integrated into the design of the model. 

• The results are an estimate of the final impact.

• Types 1 and 2 are the best models to use during an economic crisis (such as COVID-19) as they are shorter-term models and can cover large areas.  

If you have additional questions about the Input-Output model, please contact your account manager or use the Submit a Question feature on the right.