core training presentations- 8 introduction to impact economics
TRANSCRIPT
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
– 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
• The products and services consumed at a given price
Explaining Demand
• The products and services consumed at a given price
• Consumers face budgetary constraints
Explaining Demand Deriving the Demand Curve
QTea
QCoffee
QCoffee
P Coff
ee
• The products and services consumed at a given price
• Consumers face budgetary constraints– Must make trade offs based on
preferences (elasticity)
Explaining Demand Deriving the Demand Curve
QTea
QCoffee
QCoffee
P Coff
ee
Inelastic Demand
Elastic Demand
Price
Quantity
Price
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
Wheat
Maize
Wheat
Maize
Wheat
Better Wheat Fertilizers 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?– What happens at price P2?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-
Q1
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?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-
Q1- Producers will have to
lower prices to sell excess production
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?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-
Q1- Producers will have to
lower prices to sell excess production
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 P1?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q2- Producers will produce
Q1- There is now a shortage
Q2-Q1
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 P1?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q2- Producers will produce
Q1- There is now a shortage
Q2-Q1- Excess demand will
push prices up till production meets demand
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 P1?
Simplified Supply Curve
P
Q
S
D
P0
P2
P1
Q1 Q2 Q0
- Consumers want Q2- Producers will produce
Q1- There is now a shortage
Q2-Q1- Excess demand will
push prices up till production meets demand
22
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
23
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
24
Crop Example
Activity• Soybean
Farm(jsoyb)
• Demands land, fertilizer, labor
Activity Output• Soybean
Commodity(csoyb)
25
Processed Commodity Example
Activity• Soybean
Processing (jsbol)
• Demands soybeans (csoyb) at market price
Processed Commodities• Soybean Oil
(csbol)• Soybean
Meal (csbml)
Complete Oilseed Activity-Commodity 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)
27
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
28
• 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
Producer Prices
Producer Price
• Price at Farm/Factory Gate
29
• 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
Consumer Prices
Producer Price
• Price at Farm/Factory Gate
Consumer Price
• Commodity prices consumers face
Marketing Margin
30
Consumer Prices
Producer Price
• Price at Farm/Factory Gate
Consumer Price
• Commodity prices consumers face
World Price
Marketing Margin
Marketing Margin
Trade Regime
31
• Consumer prices are set to either the country’s export price or its import price
• This switch allows commodities to change from globally traded to non-traded endogenously
Consumer Prices
To trade or not to trade?
32
• Commodities can be globally traded or non-traded
• This option can be set exogenously– E.g. sugar beets
• Or endogenously through the followinginequality
Tradability in IMPACT
PC
Export Price
Import Price
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