Economic Models & Consulting for

Public Decision Making:REMI Training & Workshop

July, 2003

Regional Economic Models, Inc.

Amherst, Massachusetts

The Planner’s Monday Lament(or how to lose millions painfully)

“Right back where we started from,

Do-dah, do-dah,

All the livelong day.”

Central Importance of the Economy

Economy

Geography

Environment

Land Use

Demography

Energy

Transportation

Epidemiology

Are You Involved In:

• Formulating policy?

• Making recommendations?

• Collecting and analyzing data?

• Implementing models?

• Consulting, using consultants,

other?

Competition & Advantage

• Competition is any area in the world with quality goods and services to sell, and access to markets and transportation.

• Advantage goes to relatively productive total resources, not to merely cheap labor.

• Competition and advantage are regional.

Assess Long-range Effects• Workforce training and public health planning• School, elderly, ethnic, and total populations• Employment, budgets, taxes, land use planning• Transportation alternatives (ports, corridors, …)• Cluster policy examples:

– Communications– Chemicals (e.g., polymers, plastics, …)– Motor Vehicles (e.g., multi-state regional industry)– Furniture Industry and Lumber Industry products– Misc Professional (e.g., geo-spatial NASA spinoffs)

Where Does REMI Come In?

REMI provides:

•A software tool & knowledgeable client support.

•Consulting & economic analysis.

•Model integration.

Where Does REMI Come In?

REMI provides:

•A software tool & knowledgeable client support.

•Consulting & economic analysis.

•Model integration.

REMI Policy Insight Features

Applies economic theory, inter-industry links: Includes New Economic Geography Theory

Is calibrated & estimated using regional data

Is dynamic and predicts when results will occur

Cause & effect model structure explains results

Alternative structures allow sensitivity tests

Is the leading Policy Analysis model in the U.S.

REMI Model Applications

• Economic development

• Energy

• Transportation

• Environment/Regulation

• Taxation

• National-level applications

Unexpected EventsModeling and Analysis

• Understanding the Problem

• REMI’s Modeling Framework

• Application Examples

Unexpected Event Applications

• Earthquakes for the U.S. Insurance Industry• Flooding of the Mississippi River• Hurricane Effects on Florida• Port Disruption in the Northwest U.S. and Canada• 9-11 Attacks; Economic Effect on New York• Potential Economic Effects of a Bio-terror Attack

in a Major U.S. City

Energy Model

Land Use ModelPolicy Insight® Economic and Demographic

Model

Transportation Model

Financial and Exchange Rate

Model

Key Security Constraints

Energy Prices Economic Activity

Housing Demand

Land Prices

Economic Activity

Flow Capital Funds

Key Structural Breaks

Economic Effects

Travel Time Changes

Economic Flows

Examples of Model Integration

• Energy 2020• E-GAS• GIS• UrbanSim• HERS-ST• NFIB

How Does REMI Do It?

Alternative Simulation Forecast

Control Forecast

REMI Policy Variable Examples

•Output (by firm or industry)

•Spending (by demand type)

•Taxes or Subsidies

•Employment (firm, industry)

•Productivity (i.e., output per

worker per year by industry)

•Migration (international,

economic, retired)

•Non-pecuniary (amenity)

•Labor Force Participation

Rates (by cohort)

•Birth and Survival Rates (by cohort)

•Occupational Supply (by

occupation)

•Production Costs (by industry)

•Fuel, Labor, Capital Costs (by

industry)

•Prices (by consumer commodity)

•Exports to Non-local Markets (by

industry)

•Imports from Non-local Markets (by

industry; e.g., import substitution)

REMI Policy Insight Results: Sample Results by Industry

•Sector Employment (to 3 digits)

•Intermediate Output Demand Empl

•Local Consumption Employment

•Investment Activity Employment

•Government Demand Employment

•Export Employment (Gross)

•Relative Production Cost

•Relative Composite Labor Cost

•Relative Fuel Cost

•Relative Capital Cost

•Relative Composite Input Cost

•Relative Factor Productivity

•Regional Purchase Coefficient

•Labor Intensity

•Average Annual Wage Rate

•Industrial Mix Index

•Demand, Imports, Self Supply

•Exports: Region, US, World

•Sector Output (to 3 digits)

•Value Added

•Wage & Salary Disbursements

REMI Policy Insight Results: (Continued)

• Personal Income

• Transfer Payments

• Taxes

• Disposable Personal Income

• Price (PCE) Index

• Real Disposable Income

• GRP (by 22 final demand

categories, & by sector)

• Empl (by demand, & sector)

• Population

• Migrants

• Natality Rate

• Survival Rate

• Labor Force

• Participation

Rate

Aggregate Variables: Age/Gender/Cohort Variables:

REMI Model Structure (2002 - )WITH ECONOMIC GEOGRAPHY LINKAGES

Output

Market SharesLabor & Capital Demand

Population & Labor Supply

Wages, Costs & Prices

REMI Model Linkages (Excluding Economic Geography Linkages)

State and Local Government Spending

Investment

(1) Output(1) Output

Output

Exports

Consumption

Real Disposable Income

(4) Wages, Prices, and Production Costs(4) Wages, Prices, and Production Costs

Employment Opportunity

Housing Price

Wage Rate Composite Wage Rate Production Costs

Composite PricesReal Wage RateConsumer Price

Deflator

(3) Demographic(3) Demographic (2) Labor & Capital (2) Labor & Capital DemandDemand

Optimal Capital Stock

Employment

Labor/Output Ratio

(5) Market Shares(5) Market Shares

Domestic Market Share

International Market Share

Population

ParticipationRate

Migration

Labor Force

Economic Geography Linkages

Intermediate Input Productivity

Intermediate Inputs (1) Output Block

(4) Wages, Prices, and Production Costs

Composite Wage

Production Costs

Composite Prices

(3) Demographic and Labor Supply

(2) Labor & Capital Demand

Labor Access Index

Employment

Labor Productivity

(5) Market Shares

Domestic Market Share

International Market Share

EconomicMigrants

Output

Commodity Access Index

Integrated Modeling Approach REMI integrates Economic Geography (labor

& product agglomeration, accounting for distance costs & non-homogenous factor & product markets) with key modeling tools:

Model Tool Aspect

I-O Inter-industry processing from & to sectors (input-output relationships)

CGE Computable general equilibrium tendencies in factor and material input markets

Econometric Estimates derived from panel data

Types of ModelsCustomized Models Using Region Specific Data

SingleRegionModel

Single Region Model

Multi-Regional Model (linkages among regions)

Gross Commuter FlowsMulti-region exports and imports

Region1

Region2

Region3

Trade and Commuter Flow Linkages

Local Demand

Output Local Demand

Output Local Demand

Output

Flows based on estimated trade flows

Disposable Income

Local Earnings by non-Residents

Local Earnings by non-Residents

Disposable Income

Local Earnings by non-Residents

Commuter linkages based on historic commuting data

Disposable Income

Steps in Model Building

• Data preparation

• Model building programs

• Quality assurance

• Ongoing research & development

The New Economic Geography• Monopolistic Competition Base• Labor Productivity Concepts• Commodity Price Concepts• Revised Equations• New Policy Variables• “Nullify” Variables• Bulletin on Demand Variables• Group Policy Variables• Market Share/Trade Flow, & Price Elasticities• Transportation Costs Matrix• Economic Geography Conclusion

New Economic Geography(Based on Monopolistic Competition)

• Increasing economies of scale for firms (decreasing marginal costs).

• Access to product varieties from different regions.• Different delivered prices in the same industry due

to transportation or other distance deterrence costs.• Cross hauling, cluster agglomeration, and labor

productivity are explained by microeconomic gains from having choice and variety.

New EG FeaturesLabor Productivity Concepts

• Labor Access Index– Occupation & industry effects of selecting best workers

• Composite Labor Cost– Relative wage rate adjusted for labor access index

– Includes commuter distance cost blended into wage rates

• Occupation Codes– Standard occupation codes (SOCs) are implemented

– Better groupings with sectors for analysis & display

New EG FeaturesCommodity Price Concepts

• Delivered Price (wtd avg by sector at place of use)– Source production cost + transport cost to place of use– Production & transport costs reflect every source location

• Commodity Access Index (by sector at place of use)– Producer & consumer effects of better commodity access– Reflects market share changes due to composite price changes

• Composite Price (by sector at place of use)– Delivered price adjusted for commodity access index

• Production Cost (by sector at place of use)– Includes intermediate inputs from all sectors & locations– Local production cost captures intermediate input composite

prices; composite labor cost; and capital and fuel costs

New EG FeaturesRevised Equations

• The Housing Price Equation– Population & Real Disposable Income Changes

• The Wage Equation– Employment Opportunity & Occupational Demand

• The Stock Adjustment Process– New Parameters

• The Economic Migration Equation– Empl Opportunity, RWR, Consumption Access Index

• The Market Share Equations– Economic Geography & New Price Elasticities

– More sensitive to production cost changes

New EG FeaturesNew Policy Variables

• Industry Sales & Industry Employment-nonlinear– Ignores firms being displaced in a region by new firms

who are competing locally or in nearby markets.

– Treated as “international exports” for “demand source.”

– Applies input value less the local economy’s indirect effects on international exports due to production costs.

• Firm Sales and Firm Employment-nonlinear– Accounts for firms being displaced in a region by new

firms who are competing locally or in nearby markets.

– Displacement effect correlates strongly to the degree to which current firms already serve competitive markets.

New EG Features“Nullify” Variables

• Industry Sales and Employment: nullify applies.• Firm Sales and Employment: nullify not defined.• Nullify Workaround (Firm Sales & Employment)

– Defined for nullify investment only.

– Apply to non-residential capital stock variable only, in same amounts, sign, & year as the inputs for detailed construction (any non-residential) and for investment (non-residential).

– Apply to residential capital stock variable only, in same amounts, sign, & year as the inputs for detailed construction (any residential), and for investment (residential).

– Apportion as appropriate between non-residential capital stock and residential capital stock for the input to construction (non-detailed).

New EG FeaturesBulletin on Demand Variables

• Demand Variables They now cause an output response in every region which supplies the region with the changed demand. The regional trade flow shares drive the response.

• Applicability– Exogenous demand– Intermediate demand– Investment (structures) demand and PDE demand– Consumer demand and government demand– Indirect demand from bridge tables such as I-O

table, demand vector tables, and translator tables

New Policy Insight FeaturesGroup Policy Variables

• Users can define several policy variables as one.• Users can include input values or not as desired.• Useful for applying the same variables to many

simulations, or applying then editing as needed.• Example: define your own visitor days variables as

group variables, with or without values, e.g.:– Consumer demand variables (include transportation, food

& beverage, clothing & shoes, gasoline, other services, etc)– Hotel sector– Amusement & Recreation sector (or detailed output sales)– Motion Picture sector (or detailed output sales)

New EG FeaturesMarket Share/Trade Flow,

& Demand Price Elasticities

• Market Share/Trade Flow Displays– Share of local demand met by regions in model.

• Demand Price Elasticities– Alternative elasticities option for new regional

controls.– For any given simulation, test your model’s

sensitivity.

1994

PRODUCTION COSTS - CREDIT & FINANCE

C AL IF O R NIA

N E W Y O RK

TE X A S

FL O RID A

P E N NS Y L V AN IA

ILL INO ISO H IO

M ICH IG AN

N O RT H C AR O LIN A

G E O R G IA

V IR G IN IA

M A

IN

M IS S O UR I

W IS CO NS IN

TE N N E S S E E

W AS H IN G TO N

M AR Y LA ND

M INN E S O TA

LO UIS IA NA

A L

K E NT UC KY

A RIZO NA S C

C O LO R AD O

O K LA HO M A

O R E G O N

IO W A

M S

K AN S AS

A RK AN S AS

U TA HN E BR AS K A

N E W M E X IC O

M AIN E

N E V AD A

N HID AH O

M O NT AN A

S O U TH DA KO T A

N D

W Y O M ING

M exico

B ah amas

B erm ud a

0 2 0 0 4 0 0

M i le s

M a p La ye rsC o u n tr y (L o w R e s )S ta te (L o w R e s )C o u n ty (L o w R e s )

P ACT610 .0 0 0 0 to 1 .0 0 4 0 (1 2 2 )1 .0 0 4 0 to 1 .1 0 8 3 (1 2 2 )1 .1 0 8 3 to 1 .1 5 2 2 (1 2 2 )1 .1 5 2 2 to 1 .1 9 1 8 (1 2 2 )1 .1 9 1 8 to 1 .2 1 6 7 (1 2 2 )1 .2 1 6 7 to 1 .2 3 5 4 (1 2 2 )1 .2 3 5 4 to 1 .2 4 7 1 (1 2 3 )1 .2 4 7 1 to 1 .2 5 7 0 (1 2 2 )1 .2 5 7 0 to 1 .2 6 4 7 (1 2 2 )1 .2 6 4 7 to 1 .2 7 1 1 (1 2 2 )1 .2 7 1 1 to 1 .2 7 7 5 (1 2 2 )1 .2 7 7 5 to 1 .2 8 4 0 (1 2 2 )1 .2 8 4 0 to 1 .2 8 8 2 (1 2 3 )1 .2 8 8 2 to 1 .2 9 2 2 (1 2 2 )1 .2 9 2 2 to 1 .2 9 6 4 (1 2 2 )1 .2 9 6 4 to 1 .3 0 0 7 (1 2 2 )1 .3 0 0 7 to 1 .3 0 6 3 (1 2 2 )1 .3 0 6 3 to 1 .3 1 3 5 (1 2 2 )1 .3 1 3 5 to 1 .3 2 0 3 (1 2 3 )1 .3 2 0 3 to 1 .3 2 7 9 (1 2 2 )1 .3 2 7 9 to 1 .3 3 6 8 (1 2 2 )1 .3 3 6 8 to 1 .3 5 0 5 (1 2 2 )1 .3 5 0 5 to 1 .3 6 9 0 (1 2 2 )1 .3 6 9 0 to 1 .3 9 4 0 (1 2 2 )1 .3 9 4 0 to 1 0 .0 0 0 0 (1 2 3 )O th e r (1 7 9 )

Delivered Price – Credit & Finance

1994

COMPOSITE PRICE - CREDIT & FINANCE

1994

PRODUCTION COSTS - RETAIL TRADE

1994

COMPOSITE PRICE - RETAIL TRADE

1994

PRODUCTION COSTS - MOTOR VEHICLES

C AL IF O R NIA

N E W Y O RK

TE X A S

FL O RID A

P E N NS Y L V AN IA

ILL INO ISO H IO

M ICH IG AN

N O RT H C AR O LIN A

G E O R G IA

V IR G IN IA

M A

IN

M IS S O UR I

W IS CO NS IN

TE N N E S S E E

W AS H IN G TO N

M AR Y LA ND

M INN E S O TA

LO UIS IA NA

A L

K E NT UC KY

A RIZO NA S C

C O LO R AD O

O K LA HO M A

O R E G O N

IO W A

M S

K AN S AS

A RK AN S AS

U TA HN E BR AS K A

N E W M E X IC O

M AIN E

N E V AD A

N HID AH O

M O NT AN A

S O U TH DA KO T A

N D

W Y O M ING

M exico

B ah amas

B erm ud a

0 2 0 0 4 0 0

M i le s

Map LayersC o u n tr y (L o w R e s )S ta te (L o w R e s )C o u n ty (L o w R e s )

PACT3710 .0 0 0 0 to 0 .9 2 2 5 (1 2 2 )0 .9 2 2 5 to 0 .9 5 2 6 (1 2 2 )0 .9 5 2 6 to 0 .9 6 9 3 (1 2 2 )0 .9 6 9 3 to 0 .9 8 0 3 (1 2 2 )0 .9 8 0 3 to 0 .9 8 9 1 (1 2 2 )0 .9 8 9 1 to 0 .9 9 6 5 (1 2 2 )0 .9 9 6 5 to 1 .0 0 3 3 (1 2 3 )1 .0 0 3 3 to 1 .0 1 1 4 (1 2 2 )1 .0 1 1 4 to 1 .0 1 8 2 (1 2 2 )1 .0 1 8 2 to 1 .0 2 4 9 (1 2 2 )1 .0 2 4 9 to 1 .0 3 1 4 (1 2 2 )1 .0 3 1 4 to 1 .0 3 6 9 (1 2 2 )1 .0 3 6 9 to 1 .0 4 3 9 (1 2 3 )1 .0 4 3 9 to 1 .0 5 1 0 (1 2 2 )1 .0 5 1 0 to 1 .0 5 7 9 (1 2 2 )1 .0 5 7 9 to 1 .0 6 5 0 (1 2 2 )1 .0 6 5 0 to 1 .0 7 1 8 (1 2 2 )1 .0 7 1 8 to 1 .0 8 0 7 (1 2 2 )1 .0 8 0 7 to 1 .0 9 1 0 (1 2 3 )1 .0 9 1 0 to 1 .1 0 1 7 (1 2 2 )1 .1 0 1 7 to 1 .1 1 1 4 (1 2 2 )1 .1 1 1 4 to 1 .1 2 4 0 (1 2 2 )1 .1 2 4 0 to 1 .1 4 0 3 (1 2 2 )1 .1 4 0 3 to 1 .1 5 8 8 (1 2 2 )1 .1 5 8 8 to 1 0 .0 0 0 0 (1 2 3 )O th e r (1 7 9 )

Delivered Price – Motor Vehicles

1994

COMPOSITE PRICE - MOTOR VEHICLES

1994

PRODUCTION COSTS - TEXTILES

O K LA HO M A

1994

COMPOSITE PRICE - TEXTILES

1994

PRODUCTION COSTS - CHEMICALS

1994

COMPOSITE PRICE - CHEMICALS

New EG FeaturesTransportation Costs Matrix

The transportation cost matrix is a new component of the economic geography model of REMI Policy Insight. There are three components of the matrix:

– Commuting costs

– Accessibility costs

– Transportation costsThe three components respond to changes in the effective distance between regions.

Effective DistanceEffective Distance is Derived as Follows

• Capture all trade flows among all counties.• Back calculate the distance (“effective distance”)

which yields the observed trade flows, given the gravity model’s distance decay parameter (β).

• The β parameter by economic sector is the factor which best explains a change in regional output, given a change in demand. Thus, the β parameter drives the regional purchase coefficient (RPC), which is the ratio of self-supply to demand for each economic sector.

Commuting Costs

Commuting costs affect the effective distance in the occupational labor access productivity equation (by adjusting labor cost relative to the average wage rate), which feeds into industry labor access productivity and from there into composite wage rates, ultimately affecting both the composite cost of production by industry and the relative wage rate in the economic migration equation.

Accessibility Costs

Accessibility costs affect the effective distance in the intermediate input access index, which reflects a price elasticity of demand (price is sensitive to distance) and which feeds into the moving average commodity access index. The commodity access index feeds the composite input cost equation and the consumer access equation, ultimately affecting both the composite cost of production by industry and the consumption access index in the economic migration equation.

Transportation Costs

Transportation costs affect the effective distance in the delivered price equation for each sector (relative to time and to wage rates, or only to time if wage rates are unchanged), which feeds into the composite input cost equation to producers by sector and also into the consumption equation to consumers by commodity, ultimately affecting both the composite cost of production by industry and the consumption access index in the economic migration equation.

Matrix Input Internal UsageEffective Distance Equations

• Intermediate Input Access Index (Eq. 1-4)

• Labor Productivity by Occupation Due to Relative Labor Access by Occupation, and

Relative Labor Productivity Due to Industry

Concentration (Eq. 2-1a, 2-1b: Commuting)

• Delivered Average Price (Eq. 4-3: Transport)

• Share of Domestic Demand Supplied (Eq. 5-1)

Multi-Regional Price and Wage Linkages

Commodity Access

Commodity Access

Commodity Access

At market impedance estimated costs based on

dynamically estimated price elasticity

Occupational Labor Access Productivity

Composite Labor Costs

Industry Labor Access Productivity

Occupational Labor Access Productivity

Composite Labor Costs

Industry Labor Access Productivity

Occupational Labor Access Productivity

Composite Labor Costs

Industry Labor Access Productivity

Based on commuting in hours per day at one-half of the daily wage

Delivered Prices and Costs

Delivered Prices and Costs

Delivered Prices and Costs

Based on estimated transportation costsComposite and

Production Costs

Composite and Production Costs

Composite and Production Costs

Matrix Input ProcessingStandard Policy Variables vs Matrix Inputs

• Standard Policy VariablesIn most simulations, inputs are made by sector or demand source based on how each direct shock will affect each part of the economy as an element within the overall shock being assessed.

• Matrix InputsEconomic Geography matrix inputs for Commuting, Accessibility, and Transportation work their way through all sectors and regions in a set-up process before participating in the simulation itself.

Matrix Response SensitivityAssuming 1% Change in Effective Distance

Elasticity is inverse to the degree to which:• Region or state is compact in size and shape.• Supply chain and labor sources are remote from the

region and from nearby compact regions or states.• Shock is focused (i.e., degree to which shock applies

a matrix change to one directional effective distance concept rather than simultaneously to intra- and inter-distances).

Economic Geography Conclusion

A Forecasting and Policy Analysis Model that

includes product differentiation and distance

deterrence costs will enable the user to incorporate

endogenous agglomeration effects on productivity and

on consumer utility in the user’s forecasts and policy

analyses. This should open the way to more realistic

and insightful simulations for use in regional

economic policy analysis. – George Treyz

REMI’s Objective

Economic theory

Economic theory

Policy application

Policy application