Economic Models

1
Economic Models Consulting forPublic Decision
MakingREMI Training WorkshopJuly, 2003

• Regional Economic Models, Inc.
• Amherst, Massachusetts

2
The Planners Monday Lament(or how to lose
millions painfully)

• Right back where we started from,
• Do-dah, do-dah,
• All the livelong day.

3
Central Importance of the Economy
Epidemiology
Environment Land Use
Geography
Economy
Transportation
Demography
Energy
4
Are You Involved In

• Formulating policy?
• Making recommendations?
• Collecting and analyzing data?
• Implementing models?
• Consulting, using consultants, other?

5
Competition Advantage

• Competition is any area in the world with quality
  goods and services to sell, and access to markets
  and transportation.
• Advantage goes to relatively productive total
  resources, not to merely cheap labor.
• Competition and advantage are regional.

6
Assess Long-range Effects

• Workforce training and public health planning
• School, elderly, ethnic, and total populations
• Employment, budgets, taxes, land use planning
• Transportation alternatives (ports, corridors, )
• Cluster policy examples
• Communications
• Chemicals (e.g., polymers, plastics, )
• Motor Vehicles (e.g., multi-state regional
  industry)
• Furniture Industry and Lumber Industry products
• Misc Professional (e.g., geo-spatial NASA
  spinoffs)

7

• Where Does REMI Come In?
• REMI provides
• A software tool knowledgeable client support.
• Consulting economic analysis.
• Model integration.

8
REMI Policy Insight Features

• Applies economic theory, inter-industry links
• Includes New Economic Geography Theory
• Is calibrated estimated using regional data
• Is dynamic and predicts when results will occur
• Cause effect model structure explains results
• Alternative structures allow sensitivity tests
• Is the leading Policy Analysis model in the U.S.

9
REMI Model Applications

• Economic development
• Energy
• Transportation
• Environment/Regulation
• Taxation
• National-level applications

10
Unexpected EventsModeling and Analysis

• Understanding the Problem
• REMIs Modeling Framework
• Application Examples

11
Unexpected Event Applications

• Earthquakes for the U.S. Insurance Industry
• Flooding of the Mississippi River
• Hurricane Effects on Florida
• Port Disruption in the Northwest U.S. and Canada
• 9-11 Attacks Economic Effect on New York
• Potential Economic Effects of a Bio-terror Attack
  in a Major U.S. City

12
Energy Model
Energy Prices
Economic Activity
Travel Time Changes
Housing Demand
Policy Insight Economic and Demographic Model
Transportation Model
Land Use Model
Economic Flows
Land Prices
Economic Activity
Key Structural Breaks
Economic Effects
Flow Capital Funds
Financial and Exchange Rate Model
Key Security Constraints
13
Examples of Model Integration

• Energy 2020
• E-GAS
• GIS
• UrbanSim
• HERS-ST
• NFIB

14
How Does REMI Do It?
15
REMI Policy Variable Examples

• Birth and Survival Rates (by cohort)
• Occupational Supply (by
• occupation)
• Production Costs (by industry)
• Fuel, Labor, Capital Costs (by
• industry)
• Prices (by consumer commodity)
• Exports to Non-local Markets (by
• industry)
• Imports from Non-local Markets (by
• industry e.g., import substitution)

• Output (by firm or industry)
• Spending (by demand type)
• Taxes or Subsidies
• Employment (firm, industry)
• Productivity (i.e., output per
• worker per year by industry)
• Migration (international,
• economic, retired)
• Non-pecuniary (amenity)
• Labor Force Participation
• Rates (by cohort)

16
REMI Policy Insight Results Sample Results by
Industry

• Sector Employment (to 3 digits)
• Intermediate Output Demand Empl
• Local Consumption Employment
• Investment Activity Employment
• Government Demand Employment
• Export Employment (Gross)
• Relative Production Cost
• Relative Composite Labor Cost
• Relative Fuel Cost
• Relative Capital Cost
• Relative Composite Input Cost

• Relative Factor Productivity
• Regional Purchase Coefficient
• Labor Intensity
• Average Annual Wage Rate
• Industrial Mix Index
• Demand, Imports, Self Supply
• Exports Region, US, World
• Sector Output (to 3 digits)
• Value Added
• Wage Salary Disbursements

17
REMI Policy Insight Results (Continued)
Aggregate Variables
Age/Gender/ Cohort Variables

• Personal Income
• Transfer Payments
• Taxes
• Disposable Personal Income
• Price (PCE) Index
• Real Disposable Income
• GRP (by 22 final demand
• categories, by sector)
• Empl (by demand, sector)

• Population
• Migrants
• Natality Rate
• Survival Rate
• Labor Force
• Participation
• Rate

18
REMI Model Structure (2002 - )WITH ECONOMIC
GEOGRAPHY LINKAGES
Output
Population Labor Supply
Market Shares
Labor Capital Demand
Wages, Costs Prices
19
(No Transcript)
20
(No Transcript)
21
Integrated Modeling Approach

• REMI integrates Economic Geography (labor
  product agglomeration, accounting for distance
  costs non-homogenous factor product markets)
  with key modeling tools

22
Types of Models
23
Trade and Commuter Flow Linkages
Local Demand
Output
Local Demand
Output
Output
Local Demand
Flows based on estimated trade flows
24
Steps in Model Building

• Data preparation
• Model building programs
• Quality assurance
• Ongoing research development

25
The New Economic Geography

• Monopolistic Competition Base
• Labor Productivity Concepts
• Commodity Price Concepts
• Revised Equations
• New Policy Variables
• Nullify Variables
• Bulletin on Demand Variables
• Group Policy Variables
• Market Share/Trade Flow, Price Elasticities
• Transportation Costs Matrix
• Economic Geography Conclusion

26
New Economic Geography(Based on Monopolistic
Competition)

• Increasing economies of scale for firms
  (decreasing marginal costs).
• Access to product varieties from different
  regions.
• Different delivered prices in the same industry
  due to transportation or other distance
  deterrence costs.
• Cross hauling, cluster agglomeration, and labor
  productivity are explained by microeconomic gains
  from having choice and variety.

27
New EG FeaturesLabor Productivity Concepts

• Labor Access Index
• Occupation industry effects of selecting best
  workers
• Composite Labor Cost
• Relative wage rate adjusted for labor access
  index
• Includes commuter distance cost blended into wage
  rates
• Occupation Codes
• Standard occupation codes (SOCs) are implemented
• Better groupings with sectors for analysis
  display

28
New EG FeaturesCommodity Price Concepts

• Delivered Price (wtd avg by sector at place of
  use)
• Source production cost transport cost to place
  of use
• Production transport costs reflect every source
  location
• Commodity Access Index (by sector at place of
  use)
• Producer consumer effects of better commodity
  access
• Reflects market share changes due to composite
  price changes
• Composite Price (by sector at place of use)
• Delivered price adjusted for commodity access
  index
• Production Cost (by sector at place of use)
• Includes intermediate inputs from all sectors
  locations
• Local production cost captures intermediate input
  composite prices composite labor cost and
  capital and fuel costs

29
New EG FeaturesRevised Equations

• The Housing Price Equation
• Population Real Disposable Income Changes
• The Wage Equation
• Employment Opportunity Occupational Demand
• The Stock Adjustment Process
• New Parameters
• The Economic Migration Equation
• Empl Opportunity, RWR, Consumption Access Index
• The Market Share Equations
• Economic Geography New Price Elasticities
• More sensitive to production cost changes

30
New EG FeaturesNew Policy Variables

• Industry Sales Industry Employment-nonlinear
• Ignores firms being displaced in a region by new
  firms who are competing locally or in nearby
  markets.
• Treated as international exports for demand
  source.
• Applies input value less the local economys
  indirect effects on international exports due to
  production costs.
• Firm Sales and Firm Employment-nonlinear
• Accounts for firms being displaced in a region by
  new firms who are competing locally or in nearby
  markets.
• Displacement effect correlates strongly to the
  degree to which current firms already serve
  competitive markets.

31
New EG FeaturesNullify Variables

• Industry Sales and Employment nullify applies.
• Firm Sales and Employment nullify not defined.
• Nullify Workaround (Firm Sales Employment)
• Defined for nullify investment only.
• Apply to non-residential capital stock variable
  only, in same amounts, sign, year as the inputs
  for detailed construction (any non-residential)
  and for investment (non-residential).
• Apply to residential capital stock variable only,
  in same amounts, sign, year as the inputs for
  detailed construction (any residential), and for
  investment (residential).
• Apportion as appropriate between non-residential
  capital stock and residential capital stock for
  the input to construction (non-detailed).

32
New EG FeaturesBulletin on Demand Variables

• Demand Variables
• They now cause an output response in every
  region which supplies the region with the changed
  demand. The regional trade flow shares drive the
  response.
• Applicability
• Exogenous demand
• Intermediate demand
• Investment (structures) demand and PDE demand
• Consumer demand and government demand
• Indirect demand from bridge tables such as I-O
  table, demand vector tables, and translator tables

33
New Policy Insight FeaturesGroup Policy Variables

• Users can define several policy variables as one.
• Users can include input values or not as desired.
• Useful for applying the same variables to many
  simulations, or applying then editing as needed.
• Example define your own visitor days variables
  as group variables, with or without values, e.g.
• Consumer demand variables (include
  transportation, food beverage, clothing
  shoes, gasoline, other services, etc)
• Hotel sector
• Amusement Recreation sector (or detailed output
  sales)
• Motion Picture sector (or detailed output sales)

34
New EG FeaturesMarket Share/Trade Flow, Demand
Price Elasticities

• Market Share/Trade Flow Displays
• Share of local demand met by regions in model.
• Demand Price Elasticities
• Alternative elasticities option for new regional
  controls.
• For any given simulation, test your models
  sensitivity.

35
PRODUCTION COSTS - CREDIT FINANCE
36
Delivered Price Credit Finance
37
COMPOSITE PRICE - CREDIT FINANCE
38
PRODUCTION COSTS - RETAIL TRADE
39
COMPOSITE PRICE - RETAIL TRADE
40
PRODUCTION COSTS - MOTOR VEHICLES
41
Delivered Price Motor Vehicles
42
COMPOSITE PRICE - MOTOR VEHICLES
43
PRODUCTION COSTS - TEXTILES
44
COMPOSITE PRICE - TEXTILES
45
PRODUCTION COSTS - CHEMICALS
46
COMPOSITE PRICE - CHEMICALS
47
New EG FeaturesTransportation Costs Matrix

• The transportation cost matrix is a new
  component of the economic geography model of REMI
  Policy Insight. There are three components of
  the matrix
• Commuting costs
• Accessibility costs
• Transportation costs
• The three components respond to changes in the
  effective distance between regions.

48
Effective DistanceEffective Distance is Derived
as Follows

• Capture all trade flows among all counties.
• Back calculate the distance (effective
  distance) which yields the observed trade flows,
  given the gravity models distance decay
  parameter (ß).
• The ß parameter by economic sector is the factor
  which best explains a change in regional output,
  given a change in demand. Thus, the ß parameter
  drives the regional purchase coefficient (RPC),
  which is the ratio of self-supply to demand for
  each economic sector.

49
Commuting Costs

• Commuting costs affect the effective distance in
  the occupational labor access productivity
  equation (by adjusting labor cost relative to the
  average wage rate), which feeds into industry
  labor access productivity and from there into
  composite wage rates, ultimately affecting both
  the composite cost of production by industry and
  the relative wage rate in the economic migration
  equation.

50
Accessibility Costs

• Accessibility costs affect the effective
  distance in the intermediate input access index,
  which reflects a price elasticity of demand
  (price is sensitive to distance) and which feeds
  into the moving average commodity access index.
  The commodity access index feeds the composite
  input cost equation and the consumer access
  equation, ultimately affecting both the composite
  cost of production by industry and the
  consumption access index in the economic
  migration equation.

51
Transportation Costs

• Transportation costs affect the effective
  distance in the delivered price equation for each
  sector (relative to time and to wage rates, or
  only to time if wage rates are unchanged), which
  feeds into the composite input cost equation to
  producers by sector and also into the consumption
  equation to consumers by commodity, ultimately
  affecting both the composite cost of production
  by industry and the consumption access index in
  the economic migration equation.

52
Matrix Input Internal UsageEffective Distance
Equations

• Intermediate Input Access Index (Eq. 1-4)
• Labor Productivity by Occupation Due to Relative
  Labor Access by Occupation, and
• Relative Labor Productivity Due to Industry
• Concentration (Eq. 2-1a, 2-1b Commuting)
• Delivered Average Price (Eq. 4-3 Transport)
• Share of Domestic Demand Supplied (Eq. 5-1)

53
Multi-Regional Price and Wage Linkages
Occupational Labor Access Productivity
At market impedance estimated costs based on
dynamically estimated price elasticity
Based on commuting in hours per day at one-half
of the daily wage
Composite Labor Costs
Industry Labor Access Productivity
Delivered Prices and Costs
Based on estimated transportation costs
Composite and Production Costs
Commodity Access
Industry Labor Access Productivity
Industry Labor Access Productivity
Commodity Access
Commodity Access
Composite Labor Costs
Composite and Production Costs
Composite and Production Costs
Occupational Labor Access Productivity
Occupational Labor Access Productivity
Composite Labor Costs
Delivered Prices and Costs
Delivered Prices and Costs
54
Matrix Input ProcessingStandard Policy Variables
vs Matrix Inputs

• Standard Policy Variables
• In most simulations, inputs are made by sector
  or demand source based on how each direct shock
  will affect each part of the economy as an
  element within the overall shock being assessed.
• Matrix Inputs
• Economic Geography matrix inputs for Commuting,
  Accessibility, and Transportation work their way
  through all sectors and regions in a set-up
  process before participating in the simulation
  itself.

55
Matrix Response SensitivityAssuming 1 Change in
Effective Distance

• Elasticity is inverse to the degree to which
• Region or state is compact in size and shape.
• Supply chain and labor sources are remote from
  the region and from nearby compact regions or
  states.
• Shock is focused (i.e., degree to which shock
  applies a matrix change to one directional
  effective distance concept rather than
  simultaneously to intra- and inter-distances).

56
Economic Geography Conclusion

• A Forecasting and Policy Analysis Model that
  includes product differentiation and distance
  deterrence costs will enable the user to
  incorporate endogenous agglomeration effects on
  productivity and on consumer utility in the
  users forecasts and policy analyses. This
  should open the way to more realistic and
  insightful simulations for use in regional
  economic policy analysis. George Treyz

57
REMIs Objective
Economic theory
Policy application