Chapter 2 introduces Leontief’s conceptual input–output framework and explains how to develop the fundamental mathematical relationships from the interindustry transactions table. The key assumptions associated with the basic Leontief model and implications of those assumptions are recounted and the economic interpretation of the basic framework is explored. The basic framework is illustrated with a highly aggregated model of the US economy. In addition, the “price model” formulation of the input–output framework is introduced to explore the role of prices in input–output models. Appendices to this chapter include a fundamental set of mathematical conditions for input–output models, known as the Hawkins–Simon conditions.

In this chapter, we describe the two components of the database of a computable general equilibrium (CGE) model. The first is the Social Accounting Matrix (SAM). The SAM database reports the value of all transactions in an economy during a period of time. The data are organized in a logical framework that provides a visual display of the transactions as a circular flow of national income and spending. The SAM’s microeconomic data describe transactions made by each agent in a region’s economy. When aggregated, the SAM’s micro data describe the region’s macro economy. The SAM’s micro data can be used to calculate descriptive statistics on an economy’s structure. We describe three extensions to a SAM: non-diagonal make matrices, domestic trade margins, and multi-region input-output tables. A CGE model database also includes elasticity parameters that describe the responsiveness of producers and consumers to changes in income and relative prices. The role of these parameters in driving model results can be evaluated in a sensitivity analysis.