CGE models in theory and practice

Transcription

1 CGE models in theory and practice The perspective of the analysis concerning the disaster area of the Tohoku Earthquake Susanna Määttä University of Helsinki, Ruralia Institute, Seinäjoki unit February 2013 RegFin

2 Contents University of Helsinki, Ruralia-institute RegFin team Quantitative evaluation methods Overview of CGE models Basic facts Comparative-static model Dynamic model Simulation framework Rational decision makers Principle everything affects everything in the economy Money flows into and out from the region CGE models in practice The setting of quantitative assessment Research topics of RegFin assessments Examples of RegFin assessments Required data for RegFin model analysis Required data for TERM model analysis How to analyze the stricken area with CGE model Suggestion for Tsunami CGE models Contact information

3 University of Helsinki, Ruralia Institute University of Helsinki, Ruralia Institute Finland is an expert on rural and regional research and development Main mission is to foster business and livelihood of rural areas We have expertise in: natural resources rural areas and society rural entrepreneurship regional CGE modelling evaluation of regional economic effects of projects and policy Our staff is about 60 researchers and developers placed in two rural towns (Mikkeli and Seinäjoki), Institute established in 1988 Our office in Seinäjoki is in the technology centre Frami

4 University of Helsinki, Ruralia Institute: RegFin team Mainly domestic projects Hannu Törmä, Professor Seinäjoki Susanna Määttä, M.Sc. Seinäjoki Preparation and implementation of EU and other international projects Urszula Zimoch, M.Sc., Seinäjoki Katarzyna Zawalinska, D.Sc. Hab, Warsaw Poland and Seinäjoki

5 Quantitative evaluation methods All methods provide insights, but also compete with each other Data CBA IO SAM CGE Cost benefit analysis Input output technique Social accounting matrix technique Computable General Equilibrium modelling Ruralia Institute has developed for Finland CGE RegFin regional models CGE GemFin national model RegFin type CGE models for EU27 and their NUTS 2 regions

6 Overview of CGE models: Basic facts Economists began to construct CGE (Computable General Equilibrium) simulation models on a larger scale in the 1980s. The first CGE models were tailor programmed. Since the 1990s, researchers have been able to use software programs that make it easier to construct a CGE model (GEMPACK, GAMS). CGE models have been used in thousands of applications. One popular field of research has been to quantify the macro, employment, allocation and welfare effects of changes in terms of foreign trade and changes in taxation policy. During the last decade, CGE models have been programmed for several developing countries. Regional modeling is also popular. Today, CGE analysis offers a significant addition to the economist's toolbox

7 Overview of CGE models: Comparative-static model Static CGE models don't reveal the path of the economy from the benchmark equilibrium to the new equilibrium when a shock enters C Employment Change B A 0 T years Results refer to changes at some future point in time after full adjustent

8 Overview of CGE models: Dynamic model Dynamic CGE models do reveal the path of the economy from the benchmark equilibrium to the new equilibrium when a shock enters Including dynamics is a quite demanding and laborious process The dynamic version of the RegFin model is of a recursive type. The model is solved for a sequence of several years, say Researcher can then follow the adjustment of the economy to a policy or other shock on a year-to-year basis. GDP Baseline Percentage change compared to baseline Change in operational environment years

9 Overview of CGE models: Simulation framework The starting point of the analysis is the data The Social Accounting Matrix (SAM) is constructed for one socalled benchmark year The analysis continues: the values for the elasticities are specified Mathematically, a CGE model is a system of linear and non-linear definition, equilibrium and behaviour equations The model is built by using the GEMPACK software, which is high-level programming language Then parameterise the changes in economic and other policies After the changes have been fed into the model, the numeric algorithm will find new equilibrium prices and quantities for the production factors and all goods and services A good CGE analysis includes sensitivity tests using different values for the elasticities

10 Overview of CGE models: Rational decision makers Micro economics Macro economics Trade economics

11 Overview of CGE models: Principle everything affects everything in the economy

12 Overview of CGE models: Money flows into and out from the region Results are calculated in net terms, like Other regions of the country (flows out ) Own region (flows into) Change in economic conditions -> production -> Foreign Countries (flows out) RGDP = C + I + G + (Dexp Dimp) + (Fexp Fimp) + changes in stocks commuting profits, dividends, investments rents employment -> labour income -> capital income -> land income -> commuting profits, dividends, investments rents private consumption -> The effect of RGDP can be negative if domestic and/or foreign trade balances are in high deficit net payer or receiver income expenditure income tax revenues -> public consumption -> domestic exports -> domestic imports -> foreign exports -> foreign imports ->... expenditure

13 CGE models in practice: The setting of quantitative assessment Decision makers like numbers Evaluation of effects on: economic growth (RGDP), employment, income, consumption, tax revenues public services, domestic and foreign trade etc. RESULTS RESEARCH PROBLEM CALCULATION METHOD The client has plans, visions, wishes, fears, but what is their economic significance? Regional RegFin models, data sets and applied scenario analyses

14 CGE models in practice: Research topics of RegFin assessments Applied research (national and regional government, projects, firms) Industrial and other research forest, sawmill and metal industries down scaling and future visions, bioenergy potentials, bioenergy strategies, biorefinery, voluntary work, special health care, food and nature based value chains, rhytm music cluster etc. Mining investments Hannukainen, Kälviä, Laivakangas, Pajala, Pampalo, Seinäjoki, Talvivaara etc Other infrastructure investments Traffic network of Finland, pathway investments of the City of Helsinki, Pisara railroad, Turku-Pori and Tornio-Kemi highways, nuclear power plant etc Basic research EU and other international projects (FP7 CAPRI-RD, DG Regio Cohesion Policy) RegFin development of regional models, scientific articles Over 50 reported studies

15 CGE models in practice: Examples of RegFin assessments Would Pisara railway investment be worth implementing? (Finnish Transport Agency, Research Reports #11) Pisara tunnel railway from main station of Helsinki to Pasila, 10 minutes away, would free eight platforms, ease traffic in rush hours, but cost EUR 700 million Helsinki sub-region would benefit in net terms by % points in Regional GDP in the long run Cumulative curve, blue = base line, red = Pisara, green = alternative smaller project

16 CGE models in practice: Examples of RegFin assessments What is the economic effect of the food production in South-West Finland? (Reports #89) South-West Finland is a region that situates by the coast of the Archipelago Sea The survey indicates that the food production chain plays a significant role in the economy and employment of South-West Finland. % of Regional GDP % of Regional Employment Primary production 5,7 % 4,7 % Food industry 9,7 % 5,5 % Foodstuff wholesale 27,5 % 11,2 % Catering 6,1 % 4,6 % If food industry s growth expectations would come true, would food industry s impact on regional economy and employment be even more significant in the future

17 Required data for RegFin model analysis The Social Accounting Matrix (SAM) is constructed for one so-called benchmark year: this means that the CGE models are lighter in their data requirements, so their maintenance costs are lower compared with econometric macro models The SAM describes the money flows between sectors (primary, industry, services) whether they represent intermediate or final demand The cost structure of the sectors is also present The SAM also shows the factor income flows of the consumers and the structure of their final demand The public sector tax revenues and subsidies from/to different sectors and consumers are included in the SAM Finally, there are money flows of domestic and foreign exports and imports The SAM thus describes the overall structure of the economy and shows the relationships and linkages between the decision makers

18 Required data for TERM model analysis TERM for Japan 2000 (32 x 47) is available and working, data update needed The basis of data for Finland is formed of following parts: National supply and use data (from Statistics Finland, national/regional accounts) 178 sectors Automatic creation of national data base Several different regional shares (mostly from Statistics Finland, but also from other statistics and sometimes from survays) are needed to construct the regional data base Regional population Import shares Industry shares Consumption shares Government shares Investment shares. quite much can be obtained also from regional input-output tables (2002 is the most recent) Elasticities Distance matrix Etc

19 Required data for TERM model analysis

20 How to analyze the stricken area with CGE model Villagewide economic model requires a lot of work and data Requires usually a survey Village SAMs summarize and illustrade the flows of inputs, outputs and income between production of a sector and other productive sectors in the village, the flows of income between production activities and village households, the channeling of household incomes into consumption and investments, and the exchange of goods and factors between the village and the rest of the world Village SAMs have the same overall conceptual framework as national SAMs, but they depart from national SAMs in specific ways to reflect the unique nature of village economies Top-down approach is usually less time-consuming method Under the top-down approach, national results for variables such as output, employment, and final demands are disaggregated into regions by using a specific theory and indicator data (say regional value-added or employment). The 'top-down' approach is economical both of computer resources and data -- which allows very detailed models to be implemented and solved quite easily. On the other hand, region-specific supply behaviour is not easily modelled, and propinquity effects are neglected

21 Suggestion for Tsunami CGE models First: Start from TERM for Japan 2000 Update the (32 x 47) data to a more recent year 5 regions: Fukushima, Miyagi, Iwate, Aomori and Rest of Japan Bottom-up implementation Shocks at regional level, results at regional level Second: disaggregate results from above into smaller regions (say towns, villages) by using the top-down approach and available indicators (say value added, employment) Third: Collect village level data Construct a more detailed village CGE model with specific charasteristics of the village

22 Professor Hannu Törmä, , Researcher Susanna Määttä, ,