Direct and indirect transactions and requirements

TL;DR

This paper introduces new concepts and mathematical formulations for accurately quantifying direct, indirect, and total transactions between sectors in an economic system, addressing longstanding open problems.

Contribution

It develops systematic requirements matrices and coefficients for separating and quantifying sector interactions based on system decomposition theory.

Findings

Requirements matrices accurately define sector interactions

The approach correctly quantifies direct, indirect, and total transactions

Application to US economy data demonstrates practical utility

Abstract

The indirect transactions between sectors of an economic system has been a long-standing open problem. There have been numerous attempts to conceptually define and mathematically formulate this notion in various other scientific fields in literature as well. The existing direct and indirect effects formulations, however, can neither determine the direct and indirect transactions separately nor quantify these transactions between two individual sectors of interest in a multisectoral economic system. The novel concepts of the direct, indirect and transfer (total) transactions between any two sectors are introduced, and the corresponding requirements matrices and coefficients are systematically formulated relative to both final demands and gross outputs based on the system decomposition theory in the present manuscript. It is demonstrated theoretically and through illustrative examples that the proposed requirements matrices accurately define and correctly quantify the corresponding direct, indirect, and total interactions and relationships. The proposed requirements matrices for the US economy using aggregated input-output tables for multiple years are then presented and briefly analyzed.