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Task	4.	Interac*on	with		
Economy	and	Society	
Task	Leader:	Stefano	Schiavo	
	
Mar5na	Sartori	
School	of	Interna*onal	Stud...
Output	of	the	Task	
•  Economic	effects	of	changes	in	water	availability	
–  focus	on	the	agricultural	sector	
–  land	use	...
productivity. Eleven individual countries are considered (Albania, Croatia, Cyprus,
Egypt, France, Greece, Italy, Morocco,...
The	economic	model	1	
•  Computable	General	Equilibrium	-		CGE	models:			
“class	of	economic	models	that	use	actual	econom...
The	economic	model	2	
•  ”Computable”:	use	data	from	real	economies,	solved	on	a	
computer	
•  ”General”:	several	op*mizin...
The	economic	model	3	
•  From	a	mathema*cal	point	of	view,	the	model	is	a	very	
large	non-linear	system	of	equa*ons	
•  St...
Par*al	Equilibrium:			
	Economic	Theory	+	Data	
Theory	Only	 Theory	with	numbers
Par*al	Equilibrium:		
	 	Economic	Theory	Only	
Effect	of	a	Tax:	Theore,cal
Impact	using	Numbers	
Effect	of	a	Tax:	with	numbers
General	Equilibrium:	
All	markets	interac*ng	
General	Equilibrium:	
	
• 	Mul*ple	markets	
• 	Mul*ple	households	
• 	Mul*pl...
An	example:	the	macroeconomic	consequences	of	
a	lower	agricultural	produc*vity	
à	Go	far	beyond	a	drop	in	produc=on	volum...
Main	applica*ons	and	uses	of	CGEs	
•  Fields	where	CGE	models	are	tradi*onally	applied:	
–  Public	Economics	–>	typical	si...
Why	using	a	CGE	model	in	this	contex?		
•  Solid	micro-economic	founda*on:		
–  combina*on	of	standard	theory	with	detaile...
Some	”drawbacks”	of	CGE	models	
•  Specifica*on	of	func*onal	forms	
•  Calibra*on:	they	are	data	demanding	
•  May	become	r...
Why	CGE	&	Co.	are	interes*ng	
•  Flexibility:	modular	models	with	theore*cally	
sound	hypotheses	
•  Flexibility:	easy	to	...
Integrated	Assessment	Model
The	database	
•  Tables	of	transac=on	values:	input-output	table	
or	social	accoun*ng	matrix	(see	next	slide)	
–  it	cover...
The	database:	IO	tables	
•  Input-output	table:	matrix	that	depicts	inter-
industry	rela*onships	within	an	economy,	
showi...
IO	tables:	extension	
•  Environmentally	Extended	Input-Output	tables	
•  A	Social	Accoun*ng	Matrix	(SAM)	represents	
flows...
goods. In the SAM, an extra breakdown of the household sector is done to reflect the role
of people in the economy.
Append...
Typical	Outputs		
General	Outputs:	
• 	Produc*on	Levels	
• 	New	Price	Levels	&	Infla*on	
• 	Interna*onal	Trade	Volume	(impo...
The	CGE	we	use:	the	GTAP	model	
•  The	GTAP	consor*um	
•  GTAP-AEZ,	GTAP-W,	GTAP-L,	etc	–>	extensions	
of	the	original	GTA...
Grazie	
…e	adesso	tuY	a	cena!
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Water availability under climate change - CLIMAWARE project

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This illustrates the methods and the scale of the economical analyses made in the project CLIMAWARE for estimating the impact of water scarcity on Italy

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Water availability under climate change - CLIMAWARE project

  1. 1. Task 4. Interac*on with Economy and Society Task Leader: Stefano Schiavo Mar5na Sartori School of Interna*onal Studies 3rd CLIMAWARE SEMINAR December 2nd, 2015
  2. 2. Output of the Task •  Economic effects of changes in water availability –  focus on the agricultural sector –  land use change effects –  environmental policies and regula*ons •  Virtual water trade effects •  Regional coverage: EU (and not Alpine region only)
  3. 3. productivity. Eleven individual countries are considered (Albania, Croatia, Cyprus, Egypt, France, Greece, Italy, Morocco, Spain, Tunisia, and Turkey) and one aggregated residual region (XMENA, which stands for "Rest of Middle East and North Africa"). Figure 1. Methodological approach ! ! ! ! Water! Available! for! Agriculture! ! System'wide+ Economic+Effects+ Future! Water! Availability! Estimated! Change!in! Runoff! Climate! Scenario! Agricultural! Productivity! Economic! Structure! Trade! Virtual+ Water+Flows+ Water! Stock/Runoff! Relationship!! Other! Water!Uses! Crop! Response! Income! and! Welfare! ! The methodological approach
  4. 4. The economic model 1 •  Computable General Equilibrium - CGE models: “class of economic models that use actual economic data to es5mate how an economy might react to changes in policy, technology or other external factors” 1.  reproduces the structure of the whole economy and the nature of all exis*ng economic transac*ons among diverse economic agents (produc*ve sectors, households, and the government, among others) 2.  rigorous, cuYng-edge quan*ta*ve method to evaluate the impact of economic and policy shocks -par*cularly policy reforms- in the economy as a whole
  5. 5. The economic model 2 •  ”Computable”: use data from real economies, solved on a computer •  ”General”: several op*mizing agents and markets •  ”Equilibrium”: supply and demand behaviour determined by op*mizing agents –  firms that a[empt to maximize profits and minimize costs –  households who maximize “welfare” (consump*on) by choosing consump*on goods according to price –  markets where prices adjust un*l supply and demand are equal —> market equilibria •  Sta*c or Dynamic –> here sta*c •  Single or Mul*ple Region –> here mul*ple
  6. 6. The economic model 3 •  From a mathema*cal point of view, the model is a very large non-linear system of equa*ons •  Structural parameters are set to replicate observa*onal data in a base year •  Simula*ons entail changing some exogenous variables or parameters, bringing about the determina*on of a counterfactual equilibrium •  The par**on between endogenous and exogenous variables, as well as the regional and industrial disaggrega*on level, is not fixed
  7. 7. Par*al Equilibrium: Economic Theory + Data Theory Only Theory with numbers
  8. 8. Par*al Equilibrium: Economic Theory Only Effect of a Tax: Theore,cal
  9. 9. Impact using Numbers Effect of a Tax: with numbers
  10. 10. General Equilibrium: All markets interac*ng General Equilibrium: •  Mul*ple markets •  Mul*ple households •  Mul*ple firms
  11. 11. An example: the macroeconomic consequences of a lower agricultural produc*vity à Go far beyond a drop in produc=on volumes (yields)! Lower output in agriculture: 1.  brings about an increase in the prices of domes*c products, which become rela*vely more expensive than foreign products 2.  this loss of compe**veness causes subs*tu*on of domes*c goods with imports in the produc*on and consump*on processes –  real devalua*on of the na*onal currency 3.  within the agricultural sector, crops are subs*tuted –  the produc*on mix shids toward crops rela*vely more produc*ve (in this context, crops which are less affected by water shortage) à Changes in the whole structure for the economic system!
  12. 12. Main applica*ons and uses of CGEs •  Fields where CGE models are tradi*onally applied: –  Public Economics –> typical simula*on: fiscal reform –  Interna*onal Trade –> typical simula*on: interna*onal trade agreement •  Applica*ons in the field of Environmental Economics are much more recent: –  introduc*on of green taxes –  assessment of climate change impacts, affec*ng factors produc*vity, or produc*on and consump*on pa[erns –  tool for quan*fying costs and benefits of environmental policies
  13. 13. Why using a CGE model in this contex? •  Solid micro-economic founda*on: –  combina*on of standard theory with detailed data •  General vs par*al equilibrium analysis –  second-order effects –  structural change analysis –  mul*-market complex interac*ons –  able to cope with complex problems •  Quan*fy magnitudes of theore*cal results (important for policy) –  provides “evidence” to support claims –  counterfactual modeling, simula*on exercises –  iden*fy net results of counterac*ng effects –  provide a realis*c quan*fica*on of the policy effects by using real data –  trade-offs between policies can be quan*fied –  able to analyze welfare effects –  benefits and costs can be calculated, and used as evidence to support par*cular policies
  14. 14. Some ”drawbacks” of CGE models •  Specifica*on of func*onal forms •  Calibra*on: they are data demanding •  May become rather complex •  No forecas*ng: only “what-if” scenarios •  No financial and monetary issues •  No norma*ve op*miza*on •  Inappropriate scale analysis
  15. 15. Why CGE & Co. are interes*ng •  Flexibility: modular models with theore*cally sound hypotheses •  Flexibility: easy to interface with other models for mul*disciplinary research – IAM and Climate Change – Land-use models – Virtual water trade and footprint
  16. 16. Integrated Assessment Model
  17. 17. The database •  Tables of transac=on values: input-output table or social accoun*ng matrix (see next slide) –  it covers the whole economy (of a country, or even the whole world), and dis*nguishes a number of sectors, commodi*es, primary factors and (perhaps) types of household –  show, for example, the value of coal used by the iron industry •  Elas=ci=es: dimensionless parameters that capture behavioural response –  For example, export demand elas*ci*es specify by how much export volumes might fall if export prices went up
  18. 18. The database: IO tables •  Input-output table: matrix that depicts inter- industry rela*onships within an economy, showing how output from one industrial sector may become an input to another industrial sector –  column entries represent the monetary value of inputs to an industrial sector –  row entries represent the monetary value of outputs from a given sector –  this format shows how dependent each sector is on every other sector, both as a customer of outputs from other sectors and as a supplier of inputs –  factors of produc*on (labor, capital, land) and other inputs
  19. 19. IO tables: extension •  Environmentally Extended Input-Output tables •  A Social Accoun*ng Matrix (SAM) represents flows of all economic transac*ons that take place within an economy (regional or na*onal) among agents and sectors –  wages firms pay to households –  household’s consump*on of goods –  taxes and transfers administrated by the Government –  …
  20. 20. goods. In the SAM, an extra breakdown of the household sector is done to reflect the role of people in the economy. Appendix Table 1: The Structure of the SAM EXPENDITURES ENDOGENOUS EXOGENOUS TOTALS FACTORS HOUSEHOLDS PRODUCTIVE ACTIVITIES GOVERNMENT RESTOFTHE WORLD CAPITAL ACCOUNT FACTORS 0 0 T13 X14 X15 X16 Y1 HOUSEHOLDS T21 T22 0 X24 X25 X26 Y2 ENDO- GENOUS PRODUCT ACTIVITY 0 T32 T33 X34 X35 X36 Y3 GOVERNMENT L41 L42 L43 t44 t45 t46 Y4 REST OF WORLD L51 L52 L53 t54 t55 t56 Y5 EXO- GENOUS CAPITAL ACCOUNTS L61 L62 L63 t44 t45 t46 Y6 RECEIPTSORINCOMES TOTALS Y1 Y2 Y3 Y4 Y5 Y6 The village SAM for Nana Kotda consists of the following components: Production activities: The production sectors included in the SAM are: (1) crop husbandry—wheat, jowar, bajra, maize, tur, other pulses, oilseeds, cotton, fruits and vegetables, and other crops (cultivation of these crops is divided for irrigated and rainfed
  21. 21. Typical Outputs General Outputs: •  Produc*on Levels •  New Price Levels & Infla*on •  Interna*onal Trade Volume (imports and exports) •  Welfare (Equivalent Varia*on) •  Factor Returns (Wages, Return to Capital) Specialized Outputs: (if integrated into the basic model) • Environmental Indicators (CO2, Pollutants)
  22. 22. The CGE we use: the GTAP model •  The GTAP consor*um •  GTAP-AEZ, GTAP-W, GTAP-L, etc –> extensions of the original GTAP-CGE model framework – land can be transformed into cropland and pastureland, or into different crop-types, agro- ecological zones •  RunGTAP •  Regional/sectoral disaggrega*on
  23. 23. Grazie …e adesso tuY a cena!

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