Agricultural Trade Multipliers: Partially Closed Model Multipliers and Margins

Agricultural Trade Multipliers Overview ERS Estimates • Open Model Multipliers and Margins • Partially Closed Model Multipliers and Margins • Assumptions • Methodology Calculator Glossary Effects of Trade on the U.S. Economy

Warning! Unless all of the following conditions surrounding your export activity are met, it is not appropriate to use the following partially closed model multipliers.

You anticipate new and continuing demand for your exports (i.e., if you are so sure of the new markets that you would hire new employees). To take corn and country X as an example, the closed multiplier takes into account the jobs per million dollars of NEW corn exports to country X. Country X is importing corn for the first time ever, and this demand is expected to continue and even increase. U.S. farmers have to expand production to meet this demand. They plant more acres, buy new equipment, and/or hire more labor. If only some production is new and some comes from existing inventories, then the true multiplier must be a combination of open and closed depending on the percent of old and new activity.

Any new production to meet new demand for exports would require new jobs to satisfy that demand. A partially closed Input/Output (I/O) model includes the multiplier effects of the consumption made possible by the additional household income generated by the expansion of exports and subsequent employment. 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 70 percent of its income on the consumption of those goods and services during the year measured. These assumptions are imbedded in a partially closed I/O model. Any evidence that households are not receiving and spending added incomes in this manner negates the partially closed multiplier impacts.

The partially closed multiplier includes the employment which would be needed to produce and distribute the goods and services that the newly employed would purchase with their income. These are called induced effects. They are unique to new economic activity properly measured with a partially closed model. But if, for example, there were $5 million of corn exports in 2006 and $6 million in 2007, it would not be appropriate to use partially closed multipliers for the added $1 million of export if that corn came from farm inventories. If the U.S. capacity to export corn was exhausted and farmers had to go through a new round of planting to satisfy the demand for the extra $1 million of corn, it would be appropriate to use a partially closed multiplier. But only for the $1 million above the previous year’s export level.

While most of the open multiplier effects could be realized in the first several years, closed multiplier effects take several more rounds (years) of new hiring and new spending before the full multiplier effects are realized.

For additional information, see Understanding Open Versus Partially Closed Multipliers, the Assumptions, and Methodology.

2007 ERS Partially Closed Model Estimates