Measuring Value Added Vertical Integration Index of Economic Sectors in Tehran City

In this paper, we show that the output of economic sectors is not an appropriate criterion for assessing the importance of sectors. First, in the context of Leontief quantity model, each sector has two tasks: satisfying its direct and indirect final demand and also intermediate needs of other economic sectors. Many researchers observe that the sum of these leads to double counting. Second, the output of sectors is not an appropriate criterion for economic growth and welfare. To address these shortcomings, “product-to-product” approach is used, rooted in the theoretical basis of Serrafa’s production system. Pasinetti modified it as a vertical integration of production in the form of Leontief’s input-output model as an alternative method for assessing the importance of sectors. In this paper, we use this approach to answer following question, “The service sector, which has a 83% share of GDP in the city of Tehran, how much potentially does it generate indirect value added in other economic sector”? The input-output table of Tehran city which has recently been calculated as a research plan is used to quantitatively analysis of the posed question. The overall findings indicate that: first, the vertical integration index of service sector is only 0.04 units, which means that it generates only 4 units of indirect value added in the other economic sectors. Second, the vertical integration indices of four sectors of distribution services, productive services, social services and personal services are 0.08, 0.08, 0.46 and 0.40, respectively, all of them are less than 1 unit.