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The Effects of a Large BSE Outbreak in a Specific Factors Model of the US Economy. Osei-Agyeman Yeboah 1 , Henry Thompson 2 , Victor Ofori-Boadu 1 & Albert Allen 3. 1 North Carolina A&T State University 2 Auburn University 3 Mississippi State University. Introduction .

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The effects of a large bse outbreak in a specific factors model of the us economy l.jpg

The Effects of a Large BSE Outbreak in a Specific Factors Model of the US Economy

Osei-Agyeman Yeboah1,

Henry Thompson2,

Victor Ofori-Boadu1 &

Albert Allen3

1 North Carolina A&T State University

2 Auburn University

3 Mississippi State University


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Introduction Model of the US Economy

  • For nearly two decades, Bovine Spongiform Encephalopathy (BSE) has been an issue for the US beef industry after its possible link to cases of Human Creutzfeldt-Jakob disease was developed.

  • The BSE outbreak in the UK during the mid 1990s led various agencies of the US government to implement control measures.

  • The spread of BSE to Japan and Canada in 2003 led to increased USDA surveillance and research.

  • Regulatory efforts were further increased when the case of BSE was reported in the state of Washington in 2003.


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Introduction Model of the US Economy

  • Cattle prices fell by 16% and cattle futures price by 20% during the week of the reported Washington case.

  • Though prices rose back the next quarter, studies show that consumers would change their habits given a major BSE outbreak.

  • Within days of the Washington BSE incidence, 53 countries including major importers such as Japan, Mexico, South Korea and Canada placed a ban on US beef imports.


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Objective of the Study Model of the US Economy

  • This study gauges the effects of a BSE outbreak on the US in a specific factors model of production with a focus on beef, poultry, and pork industries.

  • Outputs and factor prices adjust to the falling price of beef in the model. The general equilibrium model provides a perspective based on the entire economy.


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Specific Factors Model of Production Model of the US Economy

  • The specific factors general equilibrium model assumes the following:-

    • constant returns to scale

    • full employment

    • competitive pricing

    • cost minimization

    • sector specific capital inputs

    • mobility of shared inputs

  • Competitive pricing of output and full employment of labor, energy, and industrial capital are the underlying behavioral assumptions.


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s Model of the US Economy

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Specific Factors Model of Production

  • The comparative static model solves for adjustments in factor prices and outputs to exogenous price changes.

  • Total factor supplies are fixed and capital remains industry specific, while labor and energy move freely between industries.

  • Substitution elasticities  summarize how cost minimizing industry alters inputs with changing factor prices. Industry shares  are the share of each input in each industry, and factor shares  the portion of industry revenue paid to each factor. The comparative static model is stated as:-

    (1)

  • The variables are written in vectors where w represents endogenous factor prices, x endogenous outputs, p exogenous output prices, and ^ percentage changes


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Source of Data Model of the US Economy

  • Value added and the labor bills in meat and poultry processing, other manufacturing, and services from the 2002 Economic Census.

  • Energy spending for manufacturing and services is from US Department of Energy (2001).

  • Total receipts, labor inputs, and energy data for beef, poultry, pork, and other agriculture are from the 2002 Census of Agriculture Summary by North American Industry Classification System (NAICS).

  • Capital inputs are residuals of value added after labor and energy bills.


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Specific Factors Model of Production Model of the US Economy

  • Factor shares are the portions each factor receives from revenue, and industry shares are portions of factors employed by industry.

  • Table 1 shows factor payments matrix used to derive factor shares and industry shares.

  • The industries are:

    • Meat Processing

    • Poultry Processing

    • Other Manufacturing

    • Service

    • Beef Production

    • Poultry Production

    • Pork Production

    • Other Agriculture



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Factors Shares Model of the US Economy

  • Table 2 presents the factor shares matrix θ, the share of each factor is the ratio of payments for the factor and the total sector revenue.

  • Summing down a column in Table 1 gives total sector revenue. For instance, the total revenue of beef industry $27.1billion and the capital share is $22.3/27.1 = 82%.

  • Capital implicitly includes land and has the largest factor share in each industry.

  • The service sector has the largest labor share of 33.9% followed by the other manufacturing and poultry processing with labor shares of 14.5% and 13.6 % respectively.

  • The labor share in beef production is 7.2% and in meat processing is 8.8%.


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Table 2. Factor Shares, Model of the US Economyij


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Industry Shares Model of the US Economy

  • Industry shares are reported in Table 3.

  • Summing across rows in Table 1 gives total factor incomes. Assuming perfect labor mobility, the wage is the same across sectors leading to the share of each factor in each sector.

  • For instance, total labor income in beef production is $1.9 billion, thus implying employment of $1.9/$3,164 = 0.06%.

  • Results show that beef production uses twice as much labor (0.06%) as that of poultry and pork, 0.03% respectively, and the three accounts for 68% of all agricultural labor.


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Table 3. Industry Shares, Model of the US Economyij


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Constant Elasticity of Substitution (CES) Model of the US Economy

  • Substitution elasticities summarize the cost minimizing adjustments in inputs when factor prices change as developed by Jones (1965) and Takayama (1982).

  • The cross price elasticity between the input of factor i and the payment to factor k in sector j is

    Eijk = aij/wk = kjSijk (2)

    where aij is the cost minimizing input and Sijk is the Allen partial elasticity of substitution.

    • Cobb-Douglas production implies Sijk = 1 and with constant elasticity of substitution (CES) production Sijk > 0.

    • Linear homogeneity implies kEijk = 0 and own price elasticities Eiji is the negative of the sum of cross price elasticities.


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Constant Elasticity of Substitution (CES) Model of the US Economy

  • Aggregate substitution elasticities are the weighted average of cross price elasticities for each industry,

    ik jijEijk = jijkjSijk.(3)

  • Cobb-Douglas substitution elasticities are presented in Table 4.


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Results Model of the US Economy

  • Factor shares and industry shares are used to derive the Cobb-Douglas substitution elasticities in Table 4.

  • The largest own substitution occurs for energy and the smallest is for capital in the poultry industry.

  • Every 1% increase in energy prices causes 0.61% decline in energy use.

  • Every 1% increase in the return to poultry capital lowers capital input by 0.069%.

  • Own labor substitution elasticities are larger than own capital elasticities.

  • Capital is more of a substitute for labor than energy, and energy is more of a substitute for labor than vice versa



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Results Model of the US Economy

  • Table 5 presents elasticities of factor prices with respect to prices of goods in the general equilibrium comparative statics.

  • Every 1% decrease in the price of beef would lower the return to capital in the beef industry by 1.22%.

  • The returns to all other industry capitals rise slightly with labor and energy released from beef production.

  • Larger industries have larger price effects. Every 1% increase in the price of other agricultural products raises that return to capital by 1.34% and the price of energy by 0.04% with very small losses spread across labor and other capital returns.



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Results Output Prices

  • Table 6 reports the price elasticities of outputs along the production frontier.

  • A higher price in each sector raises output in the sector and thus draw labor and energy away from other sectors.

  • The largest own output effect occurs in other agriculture where every 1% price increase raises output by 0.34%.

  • Every 1% price increase in beef raises output by 0.22% with trivial decreases across other industries and sectors.

  • The smallest own effect occurs in services.



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Results Prices

Simulated Adjustments to Price Changes:

  • If the price of beef falls, demand for poultry and pork would increase thus those prices would rise.

  • In this study it is assumed that, these price changes for poultry and pork are 10% respectively. The price of meat processing is assumed to fall 5% with increased pork processing partly offsetting the lost beef processing. The price of poultry processing is assumed to rise 10%.

  • Other agriculture might enjoy increased demand to offset the lost beef consumption. There might be small negative spillover effects on demand for manufacturing and services. To capture these adjustments, assume price changes of 1% for other agriculture, -1% for other manufacturing, and -1% for the service sector.

  • The output effects in Table 7 are derived by multiplying the output elasticities in Table 6 by the projected vector of price changes



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Results Sectors of the Economy

  • Capital returns in beef production and meat processing fell by 12.0% and 5.57%, larger than the underlying price changes due to the magnification effect of Jones (1965).

  • The return to capital in other agriculture increases 1.69%. The capital returns in the poultry and pork industries rise about 11%. Wages and energy prices each fell about 1%.

  • Outputs increase about 2% in poultry processing and pork production, and about half that much in poultry production. Other manufacturing output falls slightly, and output in other agriculture rises by 0.69%. Beef production falls -1.97% and beef revenue about 12%, the sum of the price and output declines.

  • Regarding sensitivity to substitution, factor price adjustments are identical for any degree of CES production while outputs effects are scaled. If CES = ½ the output adjustments are half as large, beef output falling 1% and beef revenue 6%. Estimates of substitution in the applied production literature are typically between ½ and 1.


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Results Sectors of the Economy

  • In the long run the lower capital returns will diminish investment and the stock of productive capital, leading to larger output adjustments.

  • Suppose capital inputs ultimately change in proportion to their returns with every 1% change in return leading to a 1% adjustment in that capital stock.

  • The subsequent output changes closely mirror adjustments in industrial capital stocks given constant returns to scale. The approximate long run output changes are then equal to the vector of capital return changes, much larger than the short run adjustments.

  • Revenue changes would be the sum of these output changes and the underlying price change. Beef revenue would fall 22% in the long run.


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Conclusion Sectors of the Economy

  • The present model provides some perspective on the potential of lower beef prices to affect the US economy. Substantial industrial and local effects would closely mirror any permanently lower price of beef but the rest of the economy would not be much affected.

  • Falling outputs and capital returns in the beef industry would be offset somewhat by benefits for the pork and poultry industries.

  • Output adjustments are smaller than price changes while effects on industry capital returns are magnified. Short run output adjustments would be negligible beyond the industries directly involved.


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Conclusion Sectors of the Economy

  • Decreased capital returns would lower industrial investment leading to larger long run output adjustments, the decline in beef production ultimately mirroring the lower price.

  • The model predicts a 12% reduction in beef revenue, amounting to $1.5 billion for 2003, providing a gauge of the benefits of increased BSE surveillance.

  • Though there is little if any potential health danger of a BSE outbreak to humans, the potential impact on the beef industry is sizeable.


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