The economy is a complex tangle of various agents that interact via transactions (sales and purchases) and contracts (lending, investing). In recent times more and more techniques from graph theory and network science are brought to bear on economic analysis. On the other hand, ever since the seminal contributions of Leontief, Input-Output Models (IO) have been widely used to describe economic relationships between economic actors (e.g. industrial sectors) operating within and between regions. IO models are central tools of Input-Output Analysis which aims to answer fundamental economic questions such as: what level of production outputs is required by industrial sectors (interacting in complex supply chains) if there is specific change in demand by consumers.
How are IO models related to Graph Theory? In this post we explore this relationship in some detail and show that both conceptually and practically it is a connection that it is useful to be aware of.