Understanding the shortcomings of commodity-based technology in input-output models: An economic-circuit approach

The Make-Use Model serves as a basis for most national accounting systems as the System of National Accounts (SNA) and is acknowledged as the most suitable model for interregional analysis. Two hypotheses are traditionally made featuring either industry-based technologies (IBT) or commodity-based technologies (CBT). While industry-based technologies can be easily interpreted in terms of a demand-driven economic circuit, it will be shown that: (1) commodity-based technologies cannot be interpreted as a demand-driven economic circuit because this involves computing the inverse of a matrix (the matrix of industry output proportions), which is either impossible or generates negative terms; (2) the only way to obtain a plausible explanation of CBT is to convert it into a supply-driven model. This provides a new reason for rejecting CBT: either IBT is adopted but violates Kop Jansen and ten Raa's axioms, or CBT is chosen but must be converted into a poor or unrealistic supply-driven model.