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Core Training Presentations- 8 Introduction to IMPACT Economics

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Global Futures & Strategic Foresight (GFSF) program enhances and uses a coordinated suite of biophysical and socioeconomic models to assess potential returns to investments in new agricultural technologies and policies. These models include IFPRI’s International Model for Policy Analysis of Agricultural Commodities and Trade (IMPACT), hydrology and water supply-demand models, and the DSSAT suite of process-based crop models.

The program also provides tools and trainings to scientists and policy makers to undertake similar assessments.

GFSF program is a Consultative Group on International Agricultural Research (CGIAR) program led by the International Food Policy Research Institute (IFPRI)

Published in: Government & Nonprofit
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Core Training Presentations- 8 Introduction to IMPACT Economics

  1. 1. Introduction to IMPACT
  2. 2. 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
  3. 3. 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)
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. Defining IMPACT: Endogenous Variables • Agriculture Sector Projections for: – Commodity Prices – Commodity Production and Demand – Crop Areas and Yields – Food Availability
  9. 9. 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
  10. 10. • The products and services consumed at a given price Explaining Demand
  11. 11. • The products and services consumed at a given price • Consumers face budgetary constraints Explaining Demand Deriving the Demand Curve QTea QCoffee QCoffee PCoffee
  12. 12. • 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 PCoffee Inelastic Demand Elastic Demand Price Quantity Price Quantity
  13. 13. Explaining Supply • The products and services supplied at a given price Simplified Supply Curve Price Quantity
  14. 14. 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
  15. 15. 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
  16. 16. 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 Q2Q0 - Consumers want Q1 - Producers produce Q2 - There is a surplus of Q2- Q1
  17. 17. 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 Q2Q0 - Consumers want Q1 - Producers produce Q2 - There is a surplus of Q2- Q1 - Producers will have to lower prices to sell excess production
  18. 18. 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 Q2Q0 - Consumers want Q1 - Producers produce Q2 - There is a surplus of Q2- Q1 - Producers will have to lower prices to sell excess production
  19. 19. 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 Q2Q0 - Consumers want Q2 - Producers will produce Q1 - There is now a shortage Q2-Q1
  20. 20. 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 Q2Q0 - Consumers want Q2 - Producers will produce Q1 - There is now a shortage Q2-Q1 - Excess demand will push prices up till production meets demand
  21. 21. 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 Q2Q0 - 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. 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 22
  23. 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 23
  24. 24. 24 Crop Example Activity • Soybean Farm (jsoyb) • Demands land, fertilizer, labor Activity Output • Soybean Commodity (csoyb)
  25. 25. 25 Processed Commodity Example Activity • Soybean Processing (jsbol) • Demands soybeans (csoyb) at market price Processed Commodities • Soybean Oil (csbol) • Soybean Meal (csbml)
  26. 26. 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. 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 27
  28. 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 28 Producer Prices Producer Price • Price at Farm/Factory Gate • 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶
  29. 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 29 Consumer Prices Producer Price • Price at Farm/Factory Gate • 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶 Consumer Price • Commodity prices consumers face Marketing Margin
  30. 30. 30 Consumer Prices Producer Price • Price at Farm/Factory Gate • 𝑃𝑃 = 1 + 𝑃𝑆𝐸 × 𝐼𝑛𝑝𝑢𝑡𝑠 𝑃𝐶 Consumer Price • Commodity prices consumers face • 𝑃𝐶 = 𝑃𝑊 × (1 + 𝑡) × (1 + 𝑀𝑀) World Price Marketing Margin Marketing Margin Trade Regime
  31. 31. • Consumer prices are set to either the country’s export price or its import price – 𝑃𝐶 = 𝑃𝑊 × (1 + 𝑡) × (1 + 𝑀𝑀) • This switch allows commodities to change from globally traded to non-traded endogenously 31 Consumer Prices To trade or not to trade?
  32. 32. • Commodities can be globally traded or non-traded • This option can be set exogenously – E.g. sugar beets • Or endogenously through the following inequality 32 Tradability in IMPACT P C Export Price Import Price 𝑃𝐸 = 𝑃𝑊 × (1 𝑃𝑀 = 𝑃𝑊 × (1 < <P E P M

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