Transcript Introduction to IMPACT Economics

Introduction to IMPACT
Models
• Models are logical constructs that represent
systems
• Models can:
– Simplify a complex system
– Provide insights to the inner workings of a system
• Models cannot explain everything
Model Vocabulary
• Agents: Actors within the system (consumers,
farmers, governments)
• Variables: Conditions defining the state of the
agents (income, farmland, technology)
– Exogenous Variables: Inputs to the model, defined by
the designer (population, income)
– Endogenous Variables: Outputs of the model (food
demand, commodity prices)
• Assumptions: Rules about interactions between
agents and variables (equilibrium, max climate
change yield reductions)
Economics
• Study of the allocation of scarce resources
• There are many allocation methods
• In Trade Theory the market is predominant
– A market is the process of negotiation between
buyers and sellers, which determines the prices
for goods and services
Economic Trade Models
• Many types of trade = Many trade models
• Defining Model Scope
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–
–
–
What is traded (general vs. partial equilibrium)
Who are the agents (micro vs. macro)
Market location (local, regional, global)
Types of analysis (normative or positive)
• IMPACT’s scope:
–
–
–
–
Partial equilibrium focused on Ag. Sector
Macro Agents
Global markets
Both normative and positive analysis
Defining IMPACT: Agents
• 159 geopolitical regional governments
• Consumers are region level agents and are
defined as either urban or rural
• Farmers are FPU-level agents and are defined
by production technology (irrigated, rainfed,
etc.)
– FPUs (Food production units) are subnational
geospatial units
Defining IMPACT: Exogenous
Variables
• Socio-demographic change (Population, GDP)
• Consumer and producer preferences
(elasticities)
• Productivity and technology change (IPRs)
• Climate change and yield response
• Starting Point (base values) and time horizon
Defining IMPACT: Endogenous
Variables
• Agriculture Sector Projections for:
– Commodity Prices
– Commodity Production and Demand
– Crop Areas and Yields
– Food Availability
Defining IMPACT: Assumptions
• Equilibrium (supply=demand)
• Demand is a function of consumer preferences,
commodity prices, and budgetary constraints
• Supply is derived from area-yield functions and is
a function of existing land, crop prices, changes in
technology, and the availability and cost of inputs
• Suppliers are profit maximizers and consumers
are utility mazimizers
Explaining Demand
• The products and services
consumed at a given price
Explaining Demand
Deriving the Demand Curve
QTea
PCoffee
• The products and services
consumed at a given price
• Consumers face budgetary
constraints
QCoffee
QCoffee
Explaining Demand
– Must make trade offs based on
preferences (elasticity)
Inelastic Demand
Deriving the Demand Curve
QTea
PCoffee
• The products and services
consumed at a given price
• Consumers face budgetary
constraints
QCoffee
Elastic Demand
Price
Price
QCoffee
Quantity
Quantity
Explaining Supply
• The products and services supplied at a given
price
Simplified Supply Curve
Price
Quantity
Explaining Supply
• The products and services supplied at a given
price
• Suppliers must determine how to best utilize
inputs for profit maximization.
Simplified Supply Curve
Price
Quantity
Maize
Wheat
Explaining Supply
• The products and services supplied at a given price
• Suppliers must determine how to best utilize inputs
for profit maximization.
– Production Possibility Frontier – Set of possible
outputs from available inputs and technology
Maize
Maize
Wheat
Maize
Wheat
Better Wheat Fertilizers
Wheat
More Arable Land
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
Simplified Supply Curve
– What happens
at price P2?
P
S
P2
- Consumers want Q1
- Producers produce Q2
- There is a surplus of Q2Q1
P0
P1
D
Q1 Q0
Q2
Q
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
– What happens
at price
P2? Curve
Simplified
Supply
P
S
P2
P0
P1
- Consumers want Q1
- Producers produce Q2
- There is a surplus of Q2Q1
- Producers will have to
lower prices to sell
excess production
D
Q1 Q0
Q2
Q
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
– What happens
at price
P2? Curve
Simplified
Supply
P
S
P2
P0
P1
- Consumers want Q1
- Producers produce Q2
- There is a surplus of Q2Q1
- Producers will have to
lower prices to sell
excess production
D
Q1 Q0
Q2
Q
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
Simplified
Supply
– What happens
at price
P1? Curve
P
S
P2
P0
P1
- Consumers want Q2
- Producers will produce
Q1
- There is now a shortage
Q2-Q1
D
Q1 Q0
Q2
Q
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
Simplified
Supply
– What happens
at price
P1? Curve
P
S
P2
P0
P1
D
Q1 Q0
Q2
- Consumers want Q2
- Producers will produce
Q1
- There is now a shortage
Q2-Q1
- Excess demand will
push prices up till
production meets
Q demand
Explaining the Market
• Markets are where consumers and producers
negotiate prices. Prices will fluctuate until
equilibrium is reached (supply=demand)
• Why assume equilibrium?
Simplified Supply Curve
– What happens
at price P1?
P
S
P2
P0
P1
D
Q1 Q0
Q2
- Consumers want Q2
- Producers will produce
Q1
- There is now a shortage
Q2-Q1
- Excess demand will
push prices up till
production meets
Q demand
Activity-Commodity Framework
• IMPACT 3 is a structural model
– Describes the production process in a reduce form
• Activities
– Represent production processes
• Farms, ranches,
processing plants
– Demand factors of
production
– Produce commodities
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Activity-Commodity Framework
• Commodities are:
– Produced
– Traded
– Consumed
– Can be endogenous
or exogenous
• Maize has endogenous production and demand
• Oilseeds have endogenous production and both
endogenous and exogenous demand (biofuels)
• Fertilizers could be considered an exogenous
commodity
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Crop Example
Activity
• Soybean
Farm
(jsoyb)
• Demands
land,
fertilizer,
labor
Activity Output
• Soybean
Commodity
(csoyb)
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Processed Commodity Example
Activity
• Soybean
Processing
(jsbol)
• Demands
soybeans
(csoyb) at
market price
Processed
Commodities
• Soybean Oil
(csbol)
• Soybean
Meal
(csbml)
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Complete Oilseed ActivityCommodity Chain
Activity
• Soybean
Farm
(jsoyb)
• Demands
land,
fertilizer,
labor
Activity
Output
• Soybean
Commodity
(csoyb)
Activity
• Soybean
Processing
(jsbol)
• Demands
soybeans
(csoyb) at
market
price
Processed
Commodities
• Soybean Oil
(csbol)
• Soybean
Meal
(csbml)
IMPACT Prices
• Prices are Endogenous
– Ensure Global Supply = Global Demand
• Each country has three markets:
– Farm gate
– National
– International
• Price wedges (marketing margins, taxes,
subsidies) between markets
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Producer Prices
Producer
Price
• Price at Farm/Factory Gate
• 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶
• Prices that are paid by traders for activity outputs
– Price at farm or factory gate
• Equal to the sum of input costs of an activity and any ad
valorem producer subsidy (PSE)
– PSEs originally are from OECD sources and have been
adjusted and mapped to IMPACT countries and activities
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Consumer Prices
Producer
Price
Marketing
Margin
• Price at Farm/Factory Gate
• 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶
Consumer
Price
• Commodity prices consumers face
• Prices consumers pay in national markets for commodities
– Includes transportation costs, as well as taxes and tariffs
• Consumer Subsidies are targeted and applied in the demand
equations
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Consumer Prices
Producer
Price
• Price at Farm/Factory Gate
• 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶
Consumer
Price
Marketing
Margin
• Commodity prices consumers
face
• 𝑃𝐶 = 𝑃𝑊 × (1 + 𝑡) × (1 +
𝑀𝑀)
Marketing
Margin
Trade
Regime
World Price
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Consumer Prices
• Consumer prices are set to
either the country’s export
price or its import price
To trade or
not to
trade?
– 𝑃𝐶 = 𝑃𝑊 × (1 + 𝑡) × (1 +
𝑀𝑀)
• This switch allows commodities
to change from globally traded
to non-traded endogenously
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Tradability in IMPACT
• Commodities can be
globally traded or
non-traded
• This option can be
set exogenously
Export
Price
Import
Price
𝑃𝐸
= 𝑃𝑊
× (1
𝑃𝑀
= 𝑃𝑊
× (1
– E.g. sugar beets
• Or endogenously
through the
following
inequality
P
E
<
P
C
<
P
M
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