Social Accounting Matrix Model and its Application
4.7 Chapter 4 problems
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disturbed by some considerable exogenous shocks, such as surge/plunge of tourism demand for small economic regions and surge/plunge of prices of goods and services by exogenous shocks. Either the exogenous shocks are relatively sudden and large, or the study region is relatively small and open, potential benefits of CGE would be higher. Estimating impacts of Asian Financial Crisis in late 1990s over economies of each nation were well- modeled by researchers at the Asian Development Bank, where initial impacts of surge of domestic interest rate, collapse of currency market are used to estimate surge of unemploy- ment rate in the economy. Aziz (2002) was a good example of such usage of CGE.
5 Is the output generated from ready made software such as IMPLAN good for my thesis?
How about a dissertation?
This is such a straightforward question that I am happy to share my view. Please make sure to ask the same question to other scholars to put answers in perspective. While the IMPLAN has very sophisticated options and settings, it also allows a novice user to gener- ate some outputs relatively easily (Olsen, 2004). It is my opinion that the accuracy of the I-O/SAM data in the IMPLAN database is relatively high, but it is up to the discretion of the user who inputs an initial shock into the model. When you deal with tourism, due to lack of a single sector as a tourism industry, you have to disaggregate the tourism expenditure into several initial shocks to different sectors to create a final demand column vector. You may use the survey results to collect an accurate representation of the population.
Unless you have unique primary data on the final demand column vector, the out- put may be good for a term paper, but may not carry enough rigor to be accepted for a Master-level thesis. Dissertations at doctorate level require your unique contribution to the body of knowledge that researchers and scholars accumulated for years, so the required rigor would be even higher than a mere calculation of impacts with the ready-made software.
If you identify the potential of the sophisticated impact calculation software such as IMPLAN, you can indeed go into considerable depth. Their database is very rich and updated annually. But you may have to fight against some general allegations that informa- tion obtained from the ready-made-software is not rigorous enough. That is rather unfortu- nate, as the IMPLAN users’ conference, held biannually, displays intriguing work by many regional government researchers and economists each time.
(d) You became a general manager of a hotel in a resort area. Your head office is consid- ering a chain-wide operating cost-reduction campaign and asks whether you would use centrally purchased frozen food items shipped to your hotel instead of the cur- rent fresh food from local market. With the proposed change, you can reduce not only the food costs at your restaurant, but also the total wages by reducing the number of prep-cooks in your kitchen. The proposed cost reduction is expected to reduce your hotels operating expenses by a few percent and thus increase the net income.
a. As a general manager, will you rather decide to join the proposed cost reduction campaign?
b. If so, what would be the possible effect, if any, to the local economy?
(e) Assume that you are currently one of students in a hospitality program. Discuss why you have to invest your precious time and tuition to educate yourself in using the trilateral structure of SAM shown in Figure 4-1.
a. Where in the SAM structure do you think you are?
b. After graduation, how will you get your investment back? What are you expected to do to get your investment (of time and money) back in this SAM world?
Q4-2 Using the data provided in MS-Excel, follow the instructions.
Policy analysis with social accounting matrix simulations
This is the case study format, in which you are required to read the case to work on the MS-Excel sheet provided separately.
[Background]
10 years after graduating from your school, you became a Minister of National Economic Planning of a hypothetical nation. Now you are faced with serious national policy choices.
Your nation has limited fiscal and administrative resources and you are required to implement one policy out of several possible choices. The Prime Minister, the only person above you in terms of national economic policy, is concerned how each policy will cause changes in personal income levels for people within different income groups. Luckily enough, you have social accounting matrix data with 20 20 industrial sectors; with additional data on household divided into nine annual incomes levels as follows: (K refers to thousands of dollars)
[Income Groups/annual basis]
Households 5 K Households 5–10K Households 10–15K Households 15–20K Households 20–30K Households 30–40K Households 40–50K Households 50–70K Households70K
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Here are the five stimulation policy choices, consisting of three export promotions and two domestic stimulation policies. To make the comparison valid, each policy will have the same initial impact (direct effect final demand) amounts as follows:
National Policy Options
1 Boosting agriculture export of $100 billion
Though your nation does not have the relatively cheaper labor cost on a global basis, a domestic pressure group asserts that efficient production methods will surely stimulate other industrial sectors which will create ‘lots of jobs’. Your nation has diplomatic skills to maneuver the international protectionism against exports of your agricultural products.
2 Boosting manufacturing exports of $100 billion
Your nation has many manufacturing activities, and some products have good interna- tional competitiveness in terms of quality, price, and durability. Both the management and trade unions are requesting that you promote industrial policies to boost your manufactur- ing exports.
3 Boosting tourism exports of $100 billion
Your nation has strong international charm to attract foreign visitors. Streamlining the entry visa procedure will certainly contribute to a massive surge in international tourists.
Though there are no domestic pressure groups representing the tourism industry per se, you vaguely recall one class at Cornell in which the teacher said something like the eco- nomic impact of the tourism sector tended to be underestimated with regard to its eco- nomic impact.
4 Boosting national defense budget of $100 billion
The Defense Minister perceives external threats and wishes to boost the national budget to cope with the threat. An increase in the defense budget has been believed to have positive impact over some income groups, but you are not too sure if the benefits will be equally distributed over the different income groups. Though this is not an export option, you may assume that funding of $100 billion is available from the budget surplus of the previous Prime Minister’s cabinet.
5 Boosting state level budget for education of $100 billion
The Prime Minister agrees with the Education Minister that the prime educational system need overhauling, even though quality of the higher education is perceived to be among the top league in the world. You may choose to let the local governments spend money for educating young people by funding them the total sum of $100 billion. You also believe in the value of education, but you are not too sure how the economic impact of such a policy will affect the income distribution of your people, due to your perception of relative lack of interindustry linkages of educational sector with other sectors.
The Mission: Quantitative Policy Analysis
Becausethe Prime Minister is mostly concerned with the estimated effects of changes in income on households to be caused by five policies, your mission is to find out the relative changes in the income for each policy over each income group.
This is how you proceed. All the tasks can be done in the MS-Excel sheet given separately.
1 You are given a SAM-based transaction table, together with the second SAM-based transac- tion table. Units are in $ million. You start working only from the third matrix to calculate the standardized A-matrix. I-matrix will be given as a relief for tedious jobs. Complete all the procedures to generate an inverse of (I – A)-matrix.
● Z-matrix 1 and 2 ← Given (shaded in yellow and blue)
● A-matrix → please complete (shaded in light green)
● I-matrix ←Given (shaded in cobalt blue)
● (I – A)-matrix → please complete (shaded in cobalt green)
● (I – A)1-matrix→ please complete (shaded in dark pink) (30/100 points given)
2 Now that you have calculated the Leontief inverse matrix (40 40), you are now required to conduct a series of impact analysis to simulate the five policies above.
Hint (1): Remember, the final demand column vector (FD:Y) would appear as zeros except with the sector you wish to give impact on. Thus giving a shock of $100 billion to an agriculture sector would look like:
FD(Y) f vector
100 000 0 0 0
0 ,
. .
⎡
⎣
⎢⎢
⎢⎢
⎢⎢
⎢⎢
⎢⎢
⎢⎢
⎢⎢
⎢
⎤
⎦
⎥⎥
⎥⎥
⎥⎥
⎥⎥
⎥⎥
⎥⎥⎥
⎥⎥
⎥
→
( This will be [401] column vector)
Hint (2): All policy simulations would require the single sector to be shocked by 100 000 except the Tourism policy options, because the tourism industry is not represented by a single sector. This is the core concept of tourism satellite accounts, about which we will learn soon. Thus you are given more explicit hints in the MS-Excel sheet on how to model the tourism impacts to the economy.
Then as you simulate the impact analysis, you will notice that a summary table together with the relative change in income (to be displayed as a percentage) have been constructed with formula (column cells: AX253−AX262). You will find the summary table in the MS-Excel sheet which looks like this, immediately on the right of cells (cell: AY253−BC262).
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Relative Change in Personal Income: Policy Simulation Table
Agriculture Machinery TOURISM* FedGov. Defense SL Education
Households 5 K Households 5–10 K Households 10–15 K Households 15–20 K Households 20–30 K Households 30–40 K Households 40–50 K Households 50–70 K Households70 K
After conducting each quantitative simulation,
● Copy the cells (cell: AX253−AX262)
● Choose ‘Paste special’ under ‘Edit’, then paste by choosing ‘Value’ into the appropriate column cells in the summary table (one of the columns situated among AY253−BC262).
Complete the table in the MS-Excel sheet.
(30/100 points given)
3 Using the space entitled ‘Comment space for Prime Minister’, please briefly answer the fol- lowing question of the Prime Minister based on your quantitative analyses of the five pol- icy options.
1. Which policy generates the highest positive change in income? Over which income group? (5 points)
2. Which is the best policy for the poorest household (income $5K/year)? (5 points) 3. How are the relative benefits of national defense spending boosting policy over the mid-
dle class? (income $20–30K, $30–40K, and $40–50K/year households: compare the num- bers for those households for defense column, then compare them horizontally across four other different policies)? (5 points)
4. How effective is the policy of boosting tourism export in relative to the other export pol- icies (agriculture and manufacturing) with regard to the relative change in income for all citizens? (5 points)
5. Why does the tourism promotion policy seems to have relative effectiveness in deal- ing with poverty problems in this nation? (Make good educated arguments based on what you see in this case and what you learned in class and from textbooks. This part is graded in accordance with the amount of thoughts and analysis into it.) (10 points)
6. Why does the poorest household tend to remain poorer no matter what you try to do?
Base your argument on what you found in your calculation using Figure 4-1: Structure of SAM (10 points)
(40/100 points)