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Multiplier analysis is an effective method of estimating the economic impact
of an economic change or shock. Economists use input-output (I/O) analysis
to calculate trade multipliers. Multipliers reflect the impacts of trade
in farm and food products in terms of employment and/or output. Benchmark
I/O tables that economists use to generate trade multipliers are published
by the U.S. Department
of Commerce, Bureau of Economic Analysis. These tables
show the production of goods and services and the transaction flows of goods
and services between different producing sectors of the economy and to different
components of final use. I/O tables are prepared primarily from U.S. census
data.
ERS annually estimates trade multipliers for agricultural and food exports
for the most current calendar year available. The employment and output
multipliers reflect 1997 levels adjusted for changes in prices and labor
productivity to the most recent year available.
Background
Multiplier analysis helps quantify the entire impact of a given economic
activity (e.g., exporting) on economic sectors, industries, and households.
For example, an agricultural trade multiplier encapsulates the relative
values of farmers' purchases of fertilizer and tractor parts from manufacturers
and the value of farm products sold to food processing plants, feed mills,
or other nonfarm businesses. Agricultural trade multipliers also include
the producing sectors' payment of wages, salaries, and other incomes
that accrue to U.S. households as a result of agricultural trade.
I/O analysis uses the information contained in "benchmark" year
accounting tables to provide a snapshot of the interrelationships between
the sectors of an economy. The Department
of Commerce's Bureau of Economic Analysis publishes
benchmark-year
accounting tables every 5 years. The most recent national-level I/O
table was constructed for calendar year 1997.
I/O Model Assumptions and Caveats
ERS estimates agricultural trade multipliers using both an open and a
partially closed I/O model. Some I/O assumptions apply to both open and
partially closed models, and some are specific to one model. Analysts
assume for both models that 1) the set of industry interrelationships
imbedded in an input-output benchmark table does not change dramatically
over time, 2) the relationships quantified in the 1997 national I/O table
adequately describe the current economy, and 3) these relationships do
not vary as production rises or falls.
Both I/O models assume the only limit on the output of an economy is
a lack of markets for its production. That is, as new demands emerge,
such as increased exports, an unlimited supply of goods will meet them.
The models do not consider capacity, feasibility, or profitability.
In practical terms, as the economy expands due to exports, one would
expect prices to change. However, I/O-based models do not consider price changes
in their equations. Price change must be dealt with exogenous to, or
outside of, the model itself, usually by indexing the results.
The ERS estimated employment multipliers are value based (i.e., number
of jobs per billion dollars). Value-based employment multipliers
change as each commodity price changes and as the Nation's labor productivity
changes. Employment multipliers should also consider the value of,
and adjust for, changes in the value of the transportation and wholesale-and-retail
trade margins associated with the export of a commodity. Adjusting the
margins will affect the total size of an employment or output multiplier.
ERS multiplier estimates have already been adjusted by these price
and labor productivity indices.
In partially closed model analysis, newly employed resources or activities
are assumed to be formerly unemployed. If the resources were previously
employed, a correct accounting of the effects would require subtracting
the value of the resources in their previous use from the estimated
increases. It is assumed that any new demand uses idle resources
(labor, land, and
production capacity). Also, the partially closed I/O model includes
the multiplier effects of the consumption made possible by the
additional household income generated by the expansion of exports. Thus,
the model assumes that households consume a fixed basket of goods and
services. To get the full multiplier effects, the household sector must 1)
continue to receive as income a constant share of each sector's
output, 2) continue consuming the same fixed bundle of goods and services,
and 3) spend about 80 percent of its income on the consumption of those goods
and services during the year measured. These assumptions are imbedded in the
partially closed I/O model.
Choosing the Right I/O Model (Open or Partially Closed)
Open
model. Open I/O models measure the direct and indirect effects of economic activity (agricultural
exports); that is, the impacts of sales and purchases
between all goods and service sectors of the economy, sales to final
demand (consumption, investment, government, and net exports), and purchases
of land, labor, and capital services. Generally, open-model multipliers
are best suited to describe what has already happened in an economy or
the interrelatedness of sectors in a base period.
In an open model, the analyst first chooses either a
level of exports or a change in exports (it does not matter which, the input-output
model is a linear and proportional economic model). The model can express the
results as an output or income multiplier by dividing the total output
or income by the value of exports (i.e., economic activity per $1 of exports).
The model generates a jobs multiplier—the number of jobs required to
produce the output that goes for export—by dividing the number of jobs by
the total value of exports (i.e., jobs per billion dollars of exports).
Partially
closed model. In addition to measuring direct and indirect effects
of economic activity (agricultural exports), partially closed I/O models
measure the induced effects; that
is, the economic effects associated with new and sustained activity that
uses previously unused resources or
production. For example, jobs are added by producers to support new higher
levels of exports, which, in turn, increase household income, industrial
activity, and national gross domestic product. These activities are the induced
effects of the economic activity generated by exports. This induced-income
increase, in turn, will generate more spending, which necessitates more production.
Partially closed model multipliers estimate the effects of the increased
spending.
Economists use a "household endogenous," or "partially
closed," I/O
model to capture the effects of the additional activity generated in the
economy when the income from the additional employment is spent. The resulting
multipliers include the direct, indirect, and induced effects of agricultural
exports.
For example, assuming that new expenditures expand corn exports by $1 billion,
but that half of this expanded export level came from current production
or stocks and half came from the new expanded corn production, the estimated
effects on economic activity (.5 x 38,400 [partially closed model estimate
of employment/$1 billion dollars of corn exports in 1997] x [a price adjustment
from 1997 values to the current price] if necessary) would be 19,200 workers
(without the price adjustment) per billion dollars of corn exports.
Before choosing to use a partially closed model, users must discern how much
of the expanded activity will come from current production or stocks and
how much will be new activity. If all export demand is met from current production
or stocks, it is not appropriate to use partially closed multiplier analysis.
If some of the demand is met by new activity, only that demand being met
by new activity should be subjected to partially closed model analysis. The
longer this new demand is expected to last, the higher the proportion of
the commodity value for which it is appropriate to use partially closed multiplier
analysis. This stipulation can significantly alter the multiplier effects.
Effects of Commodity Prices on the Size of the Multiplier
The need to adjust for price change arises because so many separate commodities
are traded that the only meaningful way to report aggregate trade data
is in value terms. When it is not practical to use individual prices,
economists use price indices to adjust a trade value to a base year's
prices. Using
price indices can influence the multiplier estimates. The price index
is an average of several prices representative of the commodity group
for which the price adjustment is being made. For example, food and feed
grains is the commodity group used for corn. The weight given each representative
commodity is fixed at the base year's level. For example, in 1997 (the
base year), corn accounted for 37 percent of food and feed grain exports.
When the relative importance of a commodity changes in the mix of agricultural
commodities traded, the price adjustment from a fixed-weight price index
will adjust, albeit imperfectly, for actual prices. See ERS
adjustments to export prices and labor productivity for the indices used in the ERS estimates.
Effects of Labor Productivity on the Number of Jobs Associated with Exports
Industry employment estimates are derived by ERS analysts based
on data from USDA's Agricultural Resource Management Survey and Bureau of
Labor Statistic's Office of Employment Projections. The open and partially
closed I/O models estimate the amount of jobs required given the levels of
economic activity, i.e. exports. The resulting ERS estimates could very well
be more or less than measurements of actual industry employment for the calendar
year—given that the model uses full-time equivalent jobs and does not account
for overtime, part time, temporary work, etc.
The employment multipliers in the ERS estimates will vary according to the commodity and/or group of commodities chosen and year measured due to labor productivity changes. For example, under 2006 economic and employment conditions, an open I/O model estimates that the economy required 12,300 workers for every billion dollars of corn exported. Labor productivity increased 50 percent in the farm sector between 1997 and 2006. Therefore the number of farm sector jobs (which are included in the 12,300 total) required to export $1 billion of corn in 2006 decreased by 50 percent between the base year of the I/O model, 1997, and 2006. See ERS adjustments to export prices and labor productivity for the indices used in the ERS multiplier estimates.
Margins
The U.S. Department of Commerce defines margin or margin costs
as "The value of the trade services provided in delivering commodities
from producers' establishments to
purchasers, where the purchaser pays for the services." The margins
included in the ERS I/O model used to calculate agricultural trade multipliers
come from the benchmark-year
I/O accounting tables and reflect national averages of the costs associated
with shipping, handling, and distributing commodities for export. By turning
these actual base-year values into a percentage distribution, a modeler can allocate prices
paid at the port to the appropriate sector (i.e., producer, transportation,
or wholesale and retail trade).
This concept is similar to "mark-ups" in
retail trade. For every dollar spent by a consumer in a retail establishment,
a portion goes directly to the seller or store where the item was purchased.
A second portion goes to the trucking company that hauled the item to the
store. The third, and usually largest, portion goes to the farm (in the
case of commodities) or manufacturer (in the case of food and nonfood items).
Similarly, port-value multipliers can
be apportioned into producer, transportation, and wholesale-and-retail-trade
margins. The benchmark I/O tables have nine
categories of margins, which are summed to three for the ERS estimates
of port-value multipliers.
Multiplier Employment Impacts (Producer or Port Stage)
Producer-value multipliers reflect the value of the commodity
as it leaves the farm gate or manufacturer's door. Port-value multipliers
include the producer value and shipping, handling, and storage charges between the
farm and the port. In the 1997 base year I/O table, the weighted-average
producer value of all agricultural exports was 83 percent of the port value.
To approximate the ERS methodology, here is a simplified example of a producer value-based open model multiplier, which estimates the total number of jobs related to a given year's level of commodity exports. First, the export value is expressed in 1997 dollars. A price index is used to convert the export level to constant 1997 dollars. For example, the indexed prices received by farmers for food and feed grains increased from 125 (1990-92=100) to 128.48 from 1997 to 2006. The $5 billion of 2006 corn exports in 1997 dollars is thus $5 billion x 125/128.48, or $4.865 billion. The value of corn exports ($4.865 billion) times an employment multiplier of 27,800 workers per billion dollars of 1997 corn exports equates to 135,235 jobs related to total corn exports. This is a producer value-based multiplier.
To understand port value-based open model multipliers, the simplified example continues. First, the share of the export value related to transportation and wholesale and retail trade, or "margins," is removed so that the multiplier applies only to the producer value of this $5 billion of 2006 corn exports. In 1997, the producer share of corn exports was 70 percent. The number of jobs related to corn exports therefore is $5 billion x .70 x 125/128.48 (the price index) x 27,800 (the number of required farm workers), or 94,665 jobs.
To use a port-value multiplier correctly, one needs to add the jobs related to assembling, handling, and shipping from the producer to the port. For transportation services, this is $5 billion x .18 (the transportation share of port value) x .773 (1997 transportation prices/2006 transportation prices) x 11,500 transportation workers per billion dollars of 1997 corn exports, or 8,001 jobs. For wholesale and retail trade services, this equates to $5 billion x .12 (the trade share of the total export value at the port) x .760 (1997 trade prices/2006 trade prices) x 19,900 trade workers per billion dollars of 1997 corn exports, or 9,074 jobs. The jobs total is 94,665 +8,001 + 9,074, or 111,740 workers. All three shares (producer, .70; transportation, .18, and wholesale and retail trade, .12) add to 1.
The first estimate for jobs related to corn exports, 135,235 workers, is higher than the second estimate because the adjustment for the feed grain price change applies to the full value of exports, even the transportation and wholesale-and-retail-trade portions. The second estimate, 111,740 workers, which includes adjustments of all port price components rather than the full value of exports, gives the most accurate multiplier.
These simplified examples do not include an adjustment for labor
productivity from the base year (1997) to the current year. However,
such adjustments are included in the ERS estimates.
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