1. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna A Spatial Market Model for CAPRI CAPRI Team Bonn CAPRI Common Agricultural Policy Regional Impact

2. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Outline Introduction: Armington approach Implementation in CAPRI model Design of country aggregate with Armington approach Data for country aggregate

3. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Armington Assumptions Consumer preferences differ by product origin “EU cheese (e.g. Parmesan) is different from U.S. cheese (e.g. Cheddar)” Assumption of heterogenous goods within the same product (U.S. cheese,...,EU cheese) That implies... Modeling of trade streams between regions necessary Detailed representation of trade policy possible Modeling of price differences between domestically produced and imported products possible

4. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Comparison Net trade / Armington Net trade Homogenous goods (all the cheese is identical) Only one price for wheat (world price for cheese) Demand function defines tons for each product (<= same utility per ton) from price/ton Armington Heterogeneous goods (cheese is different by origin) Price differs by origin (no world price for cheese) Demand function defines utility for each product (<= different utility per ton) from price/utility

5. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Armington Approach Problem: Modeling of demand for products with utility differences by origin Solution: Two stage demand system: (on top) demand system, working on utility quantities u i = f(prices) -> expenditures per product i e i =u i *p i (below) CES-utility aggregator function per product i to distribute expenditure to different origins aggregator function u i = f(x i,r,r1,.., x i,r,rn ) defines price/utility p i = (x ir,r1 p ir,r1 +...+ x i,r,rn p ir,rn ) /u i

6. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Aggregator function for utility Fix substitution elasticity for each product between different origins Aggregated utility Expenditure set by demand system e.g. for wheat consumed in the EU Trade flow (incl. domestic sales) Price depending on origin Parameter derived from substitution elasticity i product, r importing regions, r1 origins,  shift parameter,  share parameter

7. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna FOC of the Aggregator Function FOC from CES utility aggregation yield the following relation between trade flows Relation between trade flows depends on: so called “share parameters”  multiplied with the inverse import price relation substitution elasticity 1/(1+  ) Imperfect substitution (“sticky” import shares)

8. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Flowchart Armington with two regions Regional Prices Pr Supply Sr=f(Pr) Domestic Sales Imports Regional Prices Pr Supply Sr=f(Pr) Domestic Sales Imports Demand u i,r =f(p r ) Demand u i,r =f(p r ) Substitution between domestic and imports

9. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Problems of the Armington Approach Few empirical estimations of the parameters => substitution elasticities are set by a “rule-of-thumb” A zero stream in the calibrated points remains zero in all simulation runs The sum of physical flows in tons (domestic sales + imports) is not equal to the utility aggregate in simulations !!! (demand “quantities” are an utility measurement...) Recalculation of physical quantities after simulation necessary

10. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna CAPRI: Two Stage Armington Streams(R,R 1,XX)Streams(R,R n,XX).... Demand (Arm1) = Human consumption + Feed Use + Processing Domestic Sales (DSales) Imports (Arm2) Imports from different origins

11. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Overview on a country aggregate Armington Stage 2 Aggregate Armington Stage 1 aggregate Import Streams Processing Human consumption Feed Use Supply Domestic SalesExport streams Intervention sales Export subsidies ? Regional Prices and prices

12. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna FAO Data for country aggregates CEE IND CHN ANZ CAD USA ACP MED HIT CAN ROW Base year data (1998) Exogenous assumptions Policy data Quantities Trade streams Quantity developments Population growth Exchange rates Parameters behav. functions (Elasticities)... next presentation Prices Substitution elasticities (Armington) GDP growth Inflation FAO FAPRI, WBank @2030, FAPRI FAO, FAPRI For EU + MS: CAPRI data base, EU “Prospects for...”, EUROSTAT As in base year 1,9 % p.a. @2030,WATSIM Rule of thumb, Italian team ? FAO

13. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Trimming... Base year quantity and price framework from different sources for all aggregates must fit... balancing necessary Trimming of elasticity sets for each country aggregate, (supply, human consumption, feed, processing of oilseeds, processing of dairy products) to ensure compliance with micro-theory Shift of all exogenously driven quantities and prices to simulation year... balancing ensures mutually compatible assumptions

14. CAPRI 3 rd CAP-STRAT Workshop, 24./25.03.2003, Bologna Challenges... Market model consists of around 10.000 equations Simulation results obtained for 12 country aggregates x 20 products x ( 4 elements of product balances + 12 trade flows + prices...) Unresolved issue how to access and analyse information for non-EU country aggregates + trade flows