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- Learn what an economic production network is
- Explore an example of how each producing entity creates its output
1. What is a Production Network?
As discussed in the What does the U.S. economy produce? module, the United States produces goods and services across a wide variety of industries (as do all other economies). However, looking at industries in this way suggests that industries are isolated and disconnected, which is actually the opposite of the reality: industries are fundamentally interconnected and interdependent, purchasing from—and selling to—each other in a complex web of interactions.
A production network is a conceptualization of the economy that explicitly takes account of these linkages, where producing entities (such as industries) purchase inputs from other producing entities, combine those inputs to create an output, and then sell that output to other entities. Production networks provide a unique lens through which to understand how changes to one part of the economy can affect other parts of the economy.
As an example, consider the diagram below of four industries. The focus industry (shown in red) uses the outputs of three other industries: A, B, C. It combines the outputs from these suppliers to create its own output, which is then used by other industries downstream of it in the production network and/or sold to final consumers.
To make this more concrete, we could think of the focus industry as retail clothing stores, which buy clothes from the clothing manufacturing industry (Supplier A), rent retail space from the real estate industry (Supplier B), and use electricity from the utilities industry (Supplier C). The clothing stores then sell the clothes to consumers as well as to businesses in other industries.
This dynamic—of using multiple inputs to produce an output—occurs for every industry in the economy. If we consider all of these relationships together, we have a network.
The power of thinking about economies as networks is that takes interconnectedness as fundamental, which prompts—and helps us to think about—questions like: what might happen if an input that is used by many industries, such as petroleum, increases in price? Does it matter how much flexibilty industries have to switch among their inputs? What causes shocks to propagate from one part of the network to another?
Current research is attempting to answer these questions and more. Before considering some of those dynamics, we'll next examine the structure of one particular economic production network: that of the U.S. economy.