Physical interaction to me is when a human projects an action onto a computer or device, and that action is used to choose a response by said device intelligently. Interaction is not a direct translation, but rather an interpretation of an action and the reaction that follows. In my opinion, good physical interaction (in terms of technology) comes when a device has the capacity to understand slight nuances in a users action, and can respond to them quickly and in exactly the way the user had hoped for . . . maybe without even knowing the devices response was what they wanted.
A good example of technology that is not interactive would be forms of transducers. A simple two-way radio that is converting sound into radio waves is not interactive.