1. Assumption of fixed input-output coefficients: The input-output model assumes that the production coefficients, i.e., the relationship between inputs and outputs, remain constant over time. In reality, these coefficients can change due to technological advancements, changes in consumer preferences, or external factors such as government regulations.
2. Lack of consideration for dynamic effects: The input-output model does not take into account the dynamic effects of changes in the economy, such as the impact of investment on productivity or the effects of changes in consumer spending on demand. This can limit its ability to accurately predict the effects of policy changes or other external factors.
3. Inability to account for external shocks: The input-output model typically assumes a closed economy, meaning it does not consider the impact of external shocks such as changes in global trade patterns or natural disasters. This can limit its ability to accurately predict the effects of these events on the economy.
4. Simplistic treatment of labor: The input-output model often treats labor as a homogeneous input, without considering factors such as skill levels, wages, or labor market dynamics. This can limit its ability to accurately model the effects of changes in labor markets on the economy.
5. Inadequate treatment of feedback loops: The input-output model assumes a one-way flow of inputs from industries to final demand. In reality, there are often feedback loops in the economy, where changes in one sector can have ripple effects throughout the economy. The model may not adequately capture these feedback effects, leading to inaccurate predictions.
Limitatiins of input output model
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