The IMAGE CGE Model: Constructing the Base 1993 database Ronnie O’Toole Trinity College Dublin. Alan Matthews Trinity College Dublin. 20th November, 2001
Abstract The core database for IMAGE is the Irish Input-Output table from 1993, extended to a SAM (Social Accounting Matrix) to allow for the value added in the economy to accrue to one of the institutions in the economy.
The model distinguishes 34
industries, the first eight of which relate to farm level production, making it by far the most disaggregated CGE model for Ireland thus far. There are two sources of commodities, namely domestic and overseas. There are nine occupational groups and three household types, namely urban, rural farm, and rural non-farm.
This
working paper details the construction of the domestic and imported inter-industry flow matrices at both basic and purchasers’ prices, the factoral and institutional distribution of income, the final demand column vectors, margin matrices and model parameterisation. Given the model’s agricultural focus, data issues relating to the modeling approach used for the Common Agricultural Policy are discussed in a separate section.
O’Toole:
[email protected]; Matthews:
[email protected]. http://www.economics.tcd.ie/image.html
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Model website:
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Introduction
A natural extension of an Input-Output table is a SAM (Social Accounting Matrix), which allows for the value added in an economy to accrue to one of the institutions (households, government, companies etc.) in the economy. The core database for the IMAGE (Irish model of Agriculture, General Equilibrium) model is a SAM, which is a unified set of production accounts that, for any year, gives the flows between all the various productive activities. The development of this matrix is one of the key elements in the modeling process. The SAM is necessary so as to provide a link between economy-wide incomes and expenditures.
The IMAGE model distinguishes 34 industries (the first eight of which relate to farm level production, plus a separate industry for each of forestry and fishing) and 34 corresponding commodities, making it by far the most disaggregated CGE model for Ireland thus far. There are two sources of commodities, namely domestic and overseas. There are nine occupational groups and three household types, namely urban, rural farm, and rural non-farm.
The IMAGE model is based on the most recently published Irish Input-Output table from 1993 (CSO, 1996). This has been further disaggregated so as to give a more detailed representation of agriculture forestry and fishing, which is traditionally treated as one sector in published Irish Input-Output tables. 1 A full list of the sectors used is listed in the Appendix 2. Ancillary data sources used to develop the SAM are the Household Budget Survey which is based on 1994-1995 data and which incorporates household types also included in the National Farm Survey.
This working paper begins with an overview of the components of the IMAGE model database followed by a discussion of the steps behind the construction of the base data set. Section 2 concentrates on the domestic and imported inter-industry flow matrices at both basic and purchasers’ prices. Section 3 discusses the factoral distribution of income, while section 4 gives the alternative institutional distribution. Section 5 details the construction of the final demand column vectors, while Section
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6 discusses the construction of each of the margin matrices. Given the model’s agricultural focus, data issues relating to the modeling approach used for the Common Agricultural Policy are discussed in a separate Section 7 to other taxes and subsidies. Each of the model’s parameters is discussed in section 8, while section 9 concludes.
A second working paper entitled “The IMAGE CGE Model:
Understanding the Model Structure, Code and Solution Methods” (O’Toole and Matthews, 2002) details the model code.
Finally, use is made throughout this working paper of a number of key statistical sources, which, for the sake of brevity, are referenced with acronyms followed by the appropriate table number where appropriate. For example, NIE12 refers to Table 12 in the National Income and Expenditure accounts for 1998.
A full list of the
acronyms with the relevant publications is listed below.
Table 1: Acronyms Used Acronym
Full Name
CIEAS
Compendium of Irish Economic and Agricultural Statistics, DAF (1997a).
NIE
National Income and Expenditure, CSO (1998a).
A1-A2
National Input Output Accounts 1993, CSO (1998b).
Agro_IO
Agricultural Input-Output Table, O'Connor and Matthews (2000)
SA
Statistical Appendix, CSO various years.
RFTS
Road Freight Transport Survey, CSO (1994a).
REV
Statistical Report of the Revenue Commissioners (1993).
ASI
Annual Services Inquiry, CSO (1994b).
LFS
Labour Force Survey, CSO (1993b).
HBS
Household Budget Survey 1994/95, CSO (1997b)
DSESFC
Demographic, Social and Economic Situation of the Farming Community in 1991, CSO (1994c).
1
See O’Connor and Matthews, 2000 for full details.
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Figure 1 A Simplified Representation of a Social Accounting Matrix
Expenditures Institutional Accounts
Receipts
N
O+2
1
H
1
1
N
O+2
1
Production
Factors
Activities
Production
H
of
Total 1
1
Rest of World
Investment
Other
Government
Institutions
Production Activities Factors Production
Receipts
Gross 1BAS(dom)
of1CAP,
5BAS
3BAS / PO44
4BAS
2BAS, 6BAS
Demand Factor
1LAB,
Income
1LND
Income Government 0TAR, 1TAX
5TAX
Other
VLTH,
Institutions
V1OH
VHTG, 3TAX
4TAX
2TAX
Government Income
VCTH,
to
to
Institutions
VGTH
Total Foreign Rest of World 1BAS(imp)
Exch. Out Aggregate
Investment
Savings
Total
Expenditures
Expenditure by Expend.
Expenditures Gross Output
by Factors
Government
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Institutions
by Total
ForeignAggregate
Exch’ge Inflows Investment
2
The Input Output Database
Figure 1 is a schematic representation of the model's Input-Output database. Each column represents a source of domestic demand. So, reading along the row beginning with ‘Production Activities’ we can see that each industry supplies 1BAS(dom) by way of intermediate inputs, 2BAS and 6BAS to other industries as a capital input, consumed by one of the household types (3BAS/P044), used by the government in providing public goods (5BAS) or exported (4BAS). Further, the 1LAB, 1CAP and 1LND matrices show the use of each of the factors of production in the production of each industry. A fourth matrix PERS (not shown) shows the number of workers in each industry and corresponds to the O*N 1LAB matrix.
There is further information needed that is not illustrated here. Firstly, there is the incomes matrix which maps the income household types receive for the provision of labour, capital and land, while also receiving transfers from the government (VGTH). To calculate disposable income, the amount of income tax paid by each household is also calculated. There are two more matrices, namely the Make matrix (C*N) and the MPC (C*2) matrix. The former relates the production of commodity to industry. For example, electricity would largely be produced by the Electricity, Gas and Water industry, though others might produce (and use) small quantities of electricity as a by-product. In the model it is assumed that there is a one-to-one correspondence between industries and commodities. Based on this assumption, the Make matrix consists of the aggregate output for industry/commodity g on the diagonal element mgg and zero for all off diagonal elements mij, i not equal to j. The latter MPC matrix refers to the marginal propensities of consumption for each of the household types concerned.
Input-output tables for the Irish economy have been produced since 1956 and published since 1964. They are produced at relatively irregular periods, namely 1956, 1960, 1964, 1969, 1975, 1985 and 1990. 1990 was the last time a full set of tables providing both the domestic and imported flows of intermediate goods at both basic and producers’ prices was compiled. The principal input-output database used in the model is an amalgamation of two related sources. The first is the published
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41*41 input-output tables from the CSO for 1993 (CSO 1999), which provided tables of combined domestic and imported flows at both basic prices and producers’ prices. The second is the O’Connor and Matthews (2000) 33*33 domestic input-output table for 1993 at basic prices that disaggregates the agriculture, forestry and fishing sector into ten distinct groupings.
As discussed in O’Toole and Matthews (2001a), in the main industry-by-industry section in the input-output tables, it will suffice to produce four 34 * 34 matrices. These are, namely, a matrix of domestic intermediate flows at basic prices, a matrix of domestic intermediate flows at producers’ prices, a matrix of imported intermediate flows at basic prices and a matrix of imported intermediate flows at producers’ prices.
Figure 2 is a representation of the relationship between various
price measures.
Figure 2: The Relationship Between Various Price Measures Factory Gate Price + Net Indirect Tax + Margin Costs Basic Price -------Producers’ price -----------------------------Purchaser Price -------------------------------------------
In sections 2.1 and 2.2 we give a short description of the main features of the InputOutput data available for Ireland, and describe the adjustments required to ensure that they are appropriate in relation to the structure described in this section. In section 2.3 we discuss the steps taken to reconcile the two tables to form a consistent dataset.
2.1
1993 published IO accounts of Ireland
The published 1993 tables are less detailed than usual and consist of only two tables, namely a 41 branch transaction table at basic prices for domestic and imported flows combined, and a 41 branch transaction table at producers’ prices for domestic and
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imported flows combined. All imports in the first table are valued at c.i.f. prices. The difference between the two valuations is the net taxes on products (taxes on products less production subsidies) for domestic production and net taxes linked to imports (taxes less subsidies) for imported goods. Hence, for basic prices, taxes (and subsidies) are distributed along the indirect taxes row and shown as a cost to the branch purchasing the good (which of course includes final demands).
The
alternative is the producers’ prices valuation, where there is no distribution of indirect taxes or subsidies as separate rows. All indirect taxes are added into the valuation of total supply.
The approach taken was to sum the 41*41 table to 23 sectors matching those used in the O’Connor and Matthews (2000) tables, and then to disaggregate the agriculture/forestry/fishing sector into the 10 industries as classified by O’Connor and Matthews as well as separating out ‘farm animal feed’ from the ‘other food’ industry. These aggregated tables are referred to by the following names for the sake of brevity. Agro_IO is shown in full in Appendix 2.
A1:
Published CSO table, aggregated to 33 sectors, at basic prices.
A2:
Published CSO table, aggregated to 33 sectors, at producers’ prices.
Agro_IO:
O’Connor and Matthews (2000) table at basic prices.
3.2.2
1993 IO accounts for Ireland (Agro_IO)
The 1993 O’Connor and Matthews (2000) set of input-output accounts (from here on referred to as Agro_IO) were produced with the express purpose of developing more detail in relation to agricultural production.
In all previous tables, agriculture
forestry and fishing were amalgamated into one sector, while in this table, there are four livestock sectors (dairy, cattle, sheep & wool and pigs, poultry & horses four crop sectors (wheat, barley & oats, fruit & vegetables, root & green and other crops) , one sector for fishing and one sector for forestry. A farm animal feed sector was also incorporated, a sector which usually appeared in ‘other foods’, amalgamated with other activities, such as sugar refining, flour milling etc.. Another important feature
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to note in relation to agriculture is that all flows are treated on a net basis, so flows between farms are not considered.
The gain of ten sectors (10 + 1 –1) in terms of agriculture was at the price of the loss of a number of sectors. The Appendix shows the list of 18 sectors in the 41 that were amalgamated, along with their new group name. The flows that do not relate to agriculture (or forestry or fishing) in the 1993 tables are in fact based on 1990 inputoutput flows, and were updated to 1993 using the RAS procedure (Bacharach, 1970). The original table is shown in Appendix 2, and relates to domestic flows, with all imports aggregated into one row. One large advantage of this set of tables over the CSO figures is that the table has already been extended to form a rudimentary SAM. Hence there is already an institutional breakdown of income.
3.2.3
Reconciling the two sets of IO accounts
The process of reconciling the two sets of IO accounts (or more specifically the Agro_IO table and the Basic Prices table in CSO, namely A1) is a necessarily messy affair, with numerous steps. What follows is a discussion of the main steps that were followed in reconciling the data. We generally adhered to the following rules: •
In general, where a disagreement in relation to data arose, the Agro_IO figures were taken as correct.
•
Secondly, where uncertainty exists as to the correct treatment of an import flow, the figure is put in the diagonal. This has the implication that the import composition of inputs is in effect assumed to be the same as the domestic composition of inputs.
Creating the imports matrix (basic prices):
We calculate the import matrix
by subtracting Agro_IO from A1 to give matrix (A1-Agro_IO). The main problems to overcome were to provide estimates of imports used by farms, industry wide imports of farm level produce, the division of ‘other foods’ to create a separate ‘farm animal feed’ sector, making sure that the import figures made sense and finally making sure the column totals for imports equal the Agro_IO import totals.
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Firstly, Agro_IO provided the 33*8 matrix of estimates for import use of 8 of the agricultural sectors, and these estimates are incorporated here. The next step is to estimate the 8*23 matrix of industry wide imports of farm level produce. We have some guidance in that we know the column totals for these imports for each of the 23 industries in question, and can immediately identify 15 as being zero. The remaining industries are shown below in table 2 along with the amounts involved, and how they were eventually allocated.
Table 2: Allocation of Imports of Farm Produce Industry
Imports of Farm
Industry Attributed to
Gate Produce
Comparable 1990 Import
IR£ m Chemical Meat processing
1.56 42.24
IR£ m 1.56 to Other Crops 1
2
3.6 to Cattle, 0.7 to Sheep
1.96 9.31
3
17.9 to Pigs & Poultry Milk Processing Farm Animal feed
1.02 114.34
Other Food
1.02 to Dairy Pro rata based on the proportions
1.08 150.02
used of domestic agri-output.
Beverage & Tobacco
14.66
14.66 to Wheat, Barley & Oats
11.424
Textiles
28.75
28.75 to Sheep & Wool
27.845
Other Market Services
11.86
2 to Cattle
1.66
1 Based on CIEAS 83 2 Based on CIEAS 88 3 Based on CIEAS 92 and 103 respectively 4 In 1990 this consisted entirely of beverages 5 In 1990 this consisted almost entirely of textiles/clothing
In disaggregating farm animal feed and other foods from the single IO figures, two stages must be completed – namely a disaggregation of the other foods row and a disaggregation of the other foods column. The former is quite straight forward if we assume (not unreasonably) that - generally - non-agricultural industries have no use for imported inputs of farm animal feed. Firstly we know how much each sector imported of merchandise goods, and how much was invisible imports, so the latter can immediately be allocated to the ‘Other Market Services’ sector. In terms of
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merchandise goods, the methodology is somewhat subjective. If SA167 is to be believed, 248.1m of farm animal feed (the commodity) was imported in 1993. However it is impossible to both reach this target and keep imports for the industry farm animal feed at its Agro_IO target of 147.94.
Eventually we allocated the
maximum possible amount of imports of farm animal feed to the farm animal feed sector of 116.68. The remainder of the diagonal term is assumed to be imports of the commodity ‘other foods’ by the industry ‘other foods’. The import by farm animal feed and other foods of other industries output is calculated on a pro-rata basis with domestic inputs.
Along with these problems of filling in missing data, it is necessary to apply some care in ensuring that the imports produced directly from the A2-A1 operation make sense. Firstly, we assume that any cell worth equal less than 0.1 is zero. However the predicted imported figures by industry do not all match up with Agro_IO row of import totals.
By assuming zero imports of credit and insurance, the problem
automatically disappears. This would seem to indicate an error in the compilation of one of the tables. Unfortunately, historical input-output tables for Irish imports only cover merchandise imports, not service imports, so we have little guidance for the source of the error.
Finally, even after all these alterations have been made, there remain a few negative entries for imports. All but one is small enough (
