APPLIED multiplier And STRUCTURAL PATH ANALYSIS

1. APPLIED multiplier And STRUCTURAL PATH ANALYSIS CIEM – July 29, 2009 Andres Garcia DERG, University of Copenhagen

2. Overview Economic linkages, multipliers, and structural path analysis. Exercise 1: Calculating round-by-round multiplier effects in Excel. Exercise 2: Multiplier decomposition in Stata. Exercise 3: Structural path analysis in Stata. Exercise 4: Structural path analysis figures in NodeXL.

3. Economic Linkages, Multipliers, and Structural Path Analysis

4. Factor markets Commodity markets Circular flow diagram of the economy Factor earnings (value-added) Domestic private savings Fiscal surplus Direct taxes Indirect taxes Government Productive activities Households Investment Intermediate demand Social transfers Consumption spending (C) Recurrent spending (G) Investment demand (I) Sales income Exports (E) Imports (M) Rest of world Foreign grants and loans Remittances Capital inflows Source: Breisinger, Thomas, and Thurlow (2009)

5. Direct effects Consumption linkages Exogenous shock Indirect effects Backward linkages Production linkages Forward linkages Direct and indirect linkages • Exogenous demand-side shocks: Changes in export demand, government spending, or investment demand. • Total impact of an exogenous demand shock = Direct effects + Indirect effects Source: Breisinger, Thomas, and Thurlow (2009)

6. Circular income flow in the multiplier process Increase in agricultural exports A: Output multipliers B: GDP (value-added) multiplier C: Income multiplier Direct effect Indirect effects A Increase in agricultural production Production linkages B Tax leakage A Increase in factor incomes and employment Increase in nonagricultural production Government C Consumption linkages Import leakage Increase in household incomes and consumption Rest of world Source: Adapted from Breisinger, Thomas, and Thurlow (2009)

7. Structural path analysis Exogenous increase in Exports 1 billion VND Increase in agricultural exports Increase in agricultural production Multiplier 0.66 Increase in nonagricultural production Increase in low skilled labor 60% 396 million VND 15% 99 million VND Increase in rural household income Increase in medium skilled labor 660 million VND

8. Key assumptions for multipliers • Fixed prices • Unconstrained supply • Fixed technology and consumption patterns

9. Exercise 1: Calculating round-by-round multiplier effects in excel

10. Exercise: Multiplier effects

11. Exercise 2: Multiplier decomposition in Stata

12. Exercise 2. MD in Stata *Calculate identity matrix I - uses size from matrix C mat I = I(r(N)) *Calculate matrix D mat D = inv(I-B)*C *Calculate matrices M1, M2, and M3 *These matrices are calculated for 3 blocks of endogenous variables (n=3) *M1 remains constant *M2 = I + sum(D^(n-i)), for all i between 1 and n-1 *M3 = inv(I-D^n) mat M1 = inv(I-B) mat M2 = I+D+D*D mat M3 = inv(I-D*D*D) *Calculate total multiplier matrix M mat M = inv(I-A) *Calculate matrix N1, N2, and N3 mat N1 = M1 mat N2 = (M2-I)*M1 mat N3 = (M3-I)*M2*M1

13. Exercise 3: Structural path analysis in Stata

14. Exercise 3. SPA in Stata Direct influence mat DI_1 = A[dest, mid2] mat DI_2 = A[mid2, mid1] mat DI_3 = A[mid1, orig] mat DI = DI_1*DI_2*DI_3 scalar sDI = el(DI,1,1) *Required condition if sDI>sMDI & mid1~=mid2 { *Path multiplier use matrixa, clear drop if names==orig |names==dest | names==mid1 | names==mid2 drop names varn xpose, clear v drop if _varname==orig | _varname==mid1 | _varname==mid2 | _varname==dest drop _varname xpose, clear mkmat v*, matrix (A12) mat I12 = I(r(N)) mat PM = det(I12-A12)/det(I-A) mat TI = DI*PM

15. Exercise 4: Structural path analysis figures in NodeXL

16. Exercise 4. SPA Charts with NodeXL

17. Thank you Questions?