Download The Policy Analysis Matrix Computer Tutorial

The Basic Policy Analysis Matrix
Manual For Regional Workshops
A Computer Tutorial
by
Scott Pearson
Carl Gotsch
May, 2002
CHAPTER 1. THE POLICY ANALYSIS MATRIX TUTORIAL ...................................1
Introduction .........................................................................................................................1
A Single Commodity Budget at Private Prices ...................................................................1
CHAPTER 2: Additional COMMODITY BUDGETS ......................................................5
Additional Input-Output Tables ..........................................................................................5
Additional Commodity Prices ............................................................................................6
Additional Budgets .............................................................................................................7
Budget Analysis ..................................................................................................................8
Summary ...........................................................................................................................10
CHAPTER 3: FARM BUDGETS AT SOCIAL PRICES ................................................11
Adding Social Prices .........................................................................................................11
Constructing Farm Budgets at Social Prices. ....................................................................12
CHAPTER 4: THE POLICY ANALYSIS MATRIX ......................................................14
A Brief Introduction to PAMs ..........................................................................................14
Creating a PAM for High Yielding, Wet Season Paddy ...................................................15
Single Commodity PAMs for Irrigated Soybeans and Rainfed Corn ...............................16
A Farming Systems PAM .................................................................................................17
CHAPTER 5: COMPUTING SUMMARY RATIOS ......................................................19
The Ratio Table ................................................................................................................19
Sensitivity Analysis ..........................................................................................................21
CHAPTER 6: ESTIMATING SOCIAL PRICES .............................................................23
Social Prices for Tradable Goods .....................................................................................23
Determining Import Parity Prices .....................................................................................27
Determining Export Parity Prices .....................................................................................28
Linking Tables in the Spreadsheet ....................................................................................29
Sensitivity Analysis ..........................................................................................................29
Summary ...........................................................................................................................30
CHAPTER 7: COMPUTING ADDITIONAL PARITY PRICES ...................................31
Import Parity Prices ..........................................................................................................31
Export Parity Prices ..........................................................................................................32
Nontradable Good Prices ..................................................................................................33
CHAPTER 8: ANALYSIS OF NONTRADABLE SERVICES ......................................34
Decomposing Tractor Costs ..............................................................................................34
Modifications to the Spreadsheet ......................................................................................35
Sensitivity Analysis ..........................................................................................................39
Summary ...........................................................................................................................39
CHAPTER 9: ESTIMATING CAPITAL RECOVERY COSTS .....................................40
Estimating Capital Recovery Costs ..................................................................................40
Modifications to the Spreadsheet ......................................................................................40
Sensitivity Analysis ..........................................................................................................43
CHAPTER 10: SENSITIVITY TO MACROECONOMIC ASSUMPTIONS .................44
Modifying the Spreadsheet ...............................................................................................44
Sensitivity Analysis ..........................................................................................................49
Final Comments Regarding the Workbook Method .........................................................50
CHAPTER 1. THE POLICY ANALYSIS MATRIX TUTORIAL
Introduction
This tutorial provides a hands-on demonstration of the procedures used to create a policy analysis matrix
(PAM) as described by Monke and Pearson their book, The Policy Analysis Matrix for Agricultural Development. According to M-P, “The PAM is composed of two sets of identities - one set defining profitabilities and the other defining the difference between private and social prices. ... The methodology is based on
the formulation of budgets for representative activities, farming, marketing, and processing --that compose
an agricultural commodity system.”
The focus of this tutorial is at the farm level. Consequently, the budgets that are required are those associated with particular commodities.1 When calculated using private (observed) prices, the budgets capture
the incentives a farmer faces in a particular farming system. When re-calculated using social (economic)
prices, the budgets evaluate the costs and returns of commodity systems from the perpsecive of the economy as a whole.
The spreadsheet software used is in this tutorial is Microsoft Excel. (Any modern spreadsheet such as
Quattro Pro would work equally well.) The calculations can be organized on a spreadsheet in a variety of
ways.The exercises in the following chapters use the idea of “worksheets” contained in a “workbook.” For
example, major items such as private and social budgets, PAM calculations, non-tradable disaggregation,
etc. are entered as separate worksheets whose names show up as tabs along the status bar at the bottom of
the page. This procedure helps keep track of the various components of the PAM computations and facilitates sensitivity analysis. The tabs provide a visual reminder of the logic of the calculation sequence.
A Single Commodity Budget at Private Prices
The commodity budget used in this initial example is based on rice. Production and price data are used to
calculate the returns to high yielding paddy in Indonesia’s wet season. The physical components of the
budget are laid out in the Input-Output table shown in Table 1.1. (The level of disaggregation depends on
the data available. Disaggregating as much as possible makes it easier to do meaninful sensitivity analyses
later on.) Subsequent tables provide data on private prices and compute the commodity budget at private
prices.
To create the table on a spreadsheet, start a new a workbook (file) and “rename” (right mouse button) the
first worksheet tab to “P-Budget” (no quotes). Type in the labels and data for Table 1.1.After constructing
the I-O table, select the table and copy it below itself. Label the new table Table 1.2. Private Prices. Make
the necessary changes in the labels and units.Type over the cell values to enter data for prices instead of
physical input-output coefficients.
1
In Chapter 8 (Constructing PAMs for Commodity Systems) , Monke and Pearson provide a detailed discussion of
the problems associated with developing empirical estimates of commodity systems. The discussion in Chapter 9
(Farm Level Budgets and Analysis) is also essential reading before undertaking the data collection that precedes the
construction of actual budgets.
1
Table 1.1. Physical Input-Output
I-O
HY Paddy
Wet Season
Quantities
Tradables Fertilizer (kg/ha)
Factors
Urea
KCL
200
100
10
35
64
Seedbed Prep
Crop Care
Harvesting
Threshing
Drying
200
830
275
154
24
Working Capital (Rp/ha)
Tractor Services (hr/ha)
Thresher (hr/ha)
Land (ha)
(kg/ha)
413,000
18
95
1
6,250
Chemicals (kg/ha)
Seed (kg/ha)
Fuel (liters/ha)
Labor (hr/ha)
Capital
Output
Table 1.2. Private Prices
HY Paddy
Wet Season
P-Prices Quantities
Tradables Fertilizer (Rp/kg)
Factors
Urea
KCL
120
120
1,200
400
500
Seedbed Prep
Crop Care
Harvesting
Threshing
Drying
237
215
150
130
130
Chemicals (Rp/kg)
Seed (Rp/kg)
Fuel (Rp/liter
Labor (Rp/hr)
Capital
Output
Working Capital (%)
Tractor Services (Rp/hr)
Thresher (Rp/hr)
Land (Rp/ha)
(Rp/kg)
30%
621
950
225,000
175
Copy Table 1.2 below itself, and identify the new table as Table 1.3. Private Prices Budget. Make the necessary changes in the labels (units).
2
.
Table 1.3. Private Prices Budget
P-Budget
HY Paddy
Wet Season
Quantities
Tradables Fertilizer (Rp/ha)
Urea
KCL
Factors
Chemicals (Rp/ha)
Seed (Rp/ha)
Fuel (Rp/ha)
Labor (Rp/ha)
Seedbed Prep
Crop Care
Harvesting
Threshing
Drying
Capital
Output
Working Capital (Rp/ha)
Tractor Services (Rp/ha)
Thresher (Rp/ha)
Land (Rp/ha)
Total Revenue (Rp/ha)
Total Cost (excluding land) (Rp/ha)
Profit (excluding land) (Rp/ha)
Net Profit (including land) (Rp/ha)
24,000
12,000
11,400
14,000
32,000
47,400
178,450
41,250
20,020
3,120
123,900
11,178
90,250
225,000
1,093,750
608,968
484,782
259,782
Compute the cells in Table 1.3, the Private Prices Budget table, by multiplying the elements of the Prices
table times the elements of the I-O table. To minimize typing as much as possible, compute the first cell,
either by typing in the formula or by creating it with the aid of the mouse, then drag the formula down
across the other rows. (The first element might be something like =C5*C27; this becomes =C6*C28 in the
second row, =C7*C29 in the third row, etc.)
Because the tables have the same number of rows, the value for all elements of High Yield, Wet Season
paddy up to and including Total Revenue can be obtained by copying. (If you are unclear about how to
copy in Excel, look up the topic under Excel Help.)
The Private Prices Budget contains three additional rows, Total Costs, Profits, and Net Profits. To compute
Total Costs excluding Land, write a formula that sums the relevant cost elements, i.e., Urea through
Thresher services. (e.g., =SUM(C49:C63). To compute Profits (excluding Land), subtract Total Costs from
Total Revenues. To compute Net Profits (including Land), subtract Land from Profits (excluding Land).
The distinction between profits that include or exclude returns to land is important. Whereas rental values
can be observed and included in a private budget, the same is not true for social budgets. “Land is unique
because it is the only truly fixed factor in agriculture. In suburban locations, agriculture might not be the
only use for land, and prices and rental values will be influenced by off-farm opportunities. But in most
areas, the only alternative to agricultural use is no use at all (if forestry is included as an agricultural
activity). In these cases, land acts as a residual claimant on the profits from farming.”1
1
Further explanation can be found on pp. 207-209 in Monke-Pearson.
3
Save the three-table file under the heading chap1.xls. Save again to create chap1.bak.
4
CHAPTER 2: ADDITIONAL COMMODITY BUDGETS
The previous exercise resulted in a single commodity budget for high yielding paddy production. This is a
great simplification of the options available to farmers. In reality, their crop choice depends on their assessment of the expected profitability of a particular production strategy given the season, their agroclimatic
zone, as well as the cost and availability of technologies such as irrigation. The comparative advantage of a
given farming strategy within a production environment suggests what commodities farmers will find
profitable to produce. Given the complementarity and competition between the various crops, the farmer's
response to price changes (i.e., the supply response) can be quite complex because of multiple commodities, permanent crops, or technological change.1
The first step in analyzing additional alternatives is to develop the data for more commodity systems. In
this section, additional paddy production systems as well as systems for soybeans and corn will be added to
the spreadsheet. Once the budgets for the alternative crops are constructed, sensitivity analysis can be performed to gauge the potential impact of policy prices on profitability within farming systems.
Additional Input-Output Tables
The first step in computing multi-commodity budgets is to collect additional input-output information.
Return to the worksheet containing the single commodity calculations. Rename the existing input-output
table and add the data for additional commodities shown in Table 2.1. Also, add additional rows to the
table and label them Shelling and Drying.
The physical data for the paddy and non-paddy crops shown in Table 2.1 contain numerous assumptions.
The paddy growing environments are distinguished by different soil types, water control methods, and
drainage regimes. (It is important to note that, at this stage, the commodity systems are not assumed to be
different technologies for growing rice under the same environmental conditions.In other words, farmers
who grow rice cannot choose between the high yielding or average yielding regime.) Irrigated soybeans
and irrigated corn are grown in the average yielding agroclimatic environment during the dry season. Rainfed corn competes with rainfed rice.
These data also incorporate technical information about crop production. For example, rainfed paddy does
not utilize any fuel input, although diesel fuel is required to operate the tractor and power thresher. Such
fuel, however, is supplied by the rental operators of these farm machines, and its cost is included in their
rental rates. Fuel for the farmer-owned irrigation pump, on the other hand, is included as a tradable input in
irrigated paddy production.
1
A detailed discussion of the problems associated with modeling more complex commodity systems can be found on pp.
161-169 of the Monke and Pearson book.
5
Table 2.1. Physical Input-Output Data
I-O Table
Quantities
High Yield Paddy
Rainfed
Irrigated
Irrigated
Rainfed
Wet
Paddy
Soybeans
Corn
Corn
Tradables Fertilizer (kg/ha)
Factors
Urea
200
250
KCL
100
75
Chemicals (kg/ha)
10
9
4
12
8
Seed (kg/ha)
35
35
50
35
35
Fuel (liters/ha)
64
16
16
-
200
-
350
300
50
40
-
Labor (hr/ha)
Seedbed Prep
200
250
140
60
50
Crop Care
830
950
674
370
260
Harvesting
275
225
150
224
200
Threshing
154
125
60
-
-
Shelling
93
95
-
-
Drying
24
24
60
-
-
Working Capital (Rp/ha)
413,000
254,000
135,000
Tractor Services (Hr/ha)
18
Thresher (hr/ha)
95
1
1
1
1
1
(kg/ha)
6,250
4,250
1,200
3,500
3,000
Capital
Land (ha)
Output
-
-
40
65
167,000
121,000
-
-
-
-
Additional Commodity Prices
Rename the Prices table as Table 2.2 and add columns containing the prices of the new commodities. also
add the rows Shelling and Drying. Note that the prices for inputs are the same for all commodities and
hence the initial column (HY Paddy, Wet Season) can be copied into the rest of the matrix. Only the Land
and Output entries have different values for each commodity. (Redundancy of data at this point facilitates
creating the budget in the next step.)
6
Table 2.2 Additional Commodity Price Data
P-Prices
Quantities
High Yield Paddy
Rainfed
Irrigated
Irrigated
Rainfed
Wet
Paddy
Soybeans
Corn
Corn
Tradables Fertilizer (Rp/kg)
Urea
120
120
120
120
120
KCL
120
120
120
120
120
Chemicals (Rp/kg)
Factors
1,200
1,200
1,200
1,200
1,200
Seed (Rp/kg)
400
400
1,000
1,000
1,000
Fuel (Rp/liters)
500
500
500
500
500
Labor (Rp/hr):
Seedbed Prep
237
237
237
237
237
Crop Care
215
215
215
215
215
Harvesting
150
150
150
150
150
Threshing
130
130
130
130
130
Shelling
130
130
130
130
130
Drying
130
130
130
130
130
Capital:
30%
30%
30%
30%
30%
Tractor Services (Rp/hr)
Working Capital (%)
621
621
621
621
621
Thresher (Rp/hr)
950
950
950
950
950
225,000
150,000
225,000
175,000
165,000
175
175
560
150
150
Land (Rp/ha)
Output
(Rp/kg)
Additional Budgets
To compute the cells in the Budgets table, copy the HY Paddy, Wet Season column into the rest of the
matrix. The result is a table that shows the Gross Revenue budgets for a number of crops prominent in a
typical, rice-based, Indonesian farming system.
7
Table 2.3. Addditional Budgets at Private Prices
Private Budgets
High Yield Paddy Rainfed
Quantities
Wet
Irrigated
Paddy
Irrigated
Rainfed
Corn
Corn
Soybeans
Tradables Fertilizer (Rp/ha)
Factors
Urea
24000
KCL
30000
24000
42000
36000
4800
12000
9000
0
6000
Chemicals (Rp/ha)
11400
10200
4800
14400
9600
Seed (Rp/ha)
14000
14000
50000
35000
35000
Fuel (Rp/ha)
32000
0
8000
8000
0
Labor (Rp/ha)
Seedbed Prep
47400
59250
33180
14220
11850
Crop Care
178450
204250
144910
79550
55900
Harvesting
41250
33750
22500
33600
30000
Threshing
20020
16250
7800
0
12090
Shelling
0
0
12350
0
0
Drying
3120
3120
7800
0
0
Capital
Working Capital (Rp/ha)
123900
76200
40500
50100
36300
Tractor Services (Rp/ha)
11178
0
0
0
0
Thresher (Rp/ha)
90250
38000
61750
0
0
225000
150000
225000
175000
165000
Land (Rp/ha)
Output
Total Revenue (Rp/ha)
1093750
743750
672000
525000
450000
608968
494020
417590
282870
231540
Profits (excluding land) (Rp/ha)
484782
249730
254410
242130
218460
Net Profits (including land) (Rp/ha
259782
99730
29410
67130
53460
Total Costs (excluding land) (Rp/h
Budget Analysis
The budget figures shown in Table 2.3 can be used to develop a graphic analysis of comparative private
profitability. Creating such a graph requires a table drawn from Table 2.3. Immediately below Table 2.3,
create a table with the row and column labels shown below, e.g., H-W means High Yielding, Wet.
R-P
I-S
I-C
R-C
Land
H-W
225000
150000
225000
175000
165000
Total costs (excluding land)
608968
494020
417590
282870
231540
Net Profits (including land)
259782
99730
29410
67130
53460
To complete the column H-W, Land cell, click on = in the formula bar and then click on the similar cell in
Table 2.3. Copy across columns. Then click on the H-W, Total Cost cell and repeat the process.
To create the graph, select the entire table and click on the Chart Wizard icon in the main toolbar. Under
the Column options, choose the Stacked Column with 3-D Effect (center, 2nd row). Follow the directions
for creating the graph. It should look something like the following:
8
Cost and Returns in Indonesian Food Crops
1,200,000
1,000,000
800,000
Rupiahs
600,000
400,000
200,000
H-W
R-P
I-S
R-C
Crop Production Systems
Land
Total costs (excluding land)
Net Profits (including land)
Sensitivity Analysis
It is often helpful in farming systems analyses to do a sensitivity analysis of the most important parameters.
Make the following changes, noting the results in the Budget window. Compare the relative profits for the
different systems with the original results in Table 2.3. Consider whether some changes make certain crops
money losers. After each change, return the data to their original values. Use the space provided below to
note results.
1) Fertilizer prices double from Rp120/kg to Rp240/kg for urea and Rp120/kg to Rp240/kg
for KCL.
2) Fertilizer prices remain at their original values, but all labor costs double.
3) Output prices rise to Rp300/kg for paddy in all seasons.
4) Output prices fall to Rp100/kg for paddy in all seasons.
5) Yields for all crops double.
Questions
9
1. Which of type of change has the greatest impact on farmer incentives: input prices, output prices, or productivity? Why?
Changes in the costs of inputs have much smaller effects on profits than changes in the prices of outputs
because each input makes up only a fraction of the cost, whereas the output price applies to the whole of
revenues. Likewise, changes in productivity also apply to the whole of revenues.
2. What are the implications of this kind of sensitivity analysis for data collection efforts? If resources for
research on agricultural policy are scarce, do these results suggest the types of empirical work a ministry or
planning unit ought to focus on?
The results of the sensitivity analysis strongly suggest that the highest research priority is to obtain the best
possible data on output prices and yields. The next highest priority would be the largest item in costs, say,
labor. Only after the larger cost items have been determined should minor costs be investigated. The
“what-if” feature of spreadsheets makes it possible to determine quickly exactly how much impact a particular price has on the overall results. Efforts to improve the database can be organized accordingly.
3. In many countries, different government agencies administer output and input prices. What are the policy implications of these results for farmer incentives?
The total effect of all price and production policies influences farmer incentives to grow crops -- the farmer
responds to changes in profitability, regardless of the source of these changes. Given the possibility that
various policies could amplify or counteract one another, it is essential that different government agencies
coordinate their efforts to ensure consistency.
4. What can be said about the competitiveness of the various production systems?
Significant private profits in a system mean that rents accrue to the owners of domestic resources such as
land. In a perfectly competitive system, there are no profits, i.e., in equilibrium, factors are paid the values
of their marginal product. Consequently, the positive profits observed in these systems imply incomplete
adjustment toward a zero-profit equilibrium, especially as regards irrigated rice production. This result is
typical for most economies, particularly those in developing countries.
Summary
The current farming system covers three commodities (rice, soybeans, and corn) produced under varying
technologies (irrigated, rainfed) in different agroclimatic regimes (high, average) and in different seasons
(wet, dry). Some of these crop choices are complements, grown in alternate seasons or on different lands.
Others are direct substitutes, competing for the same agricultural resources.
The values obtained in the private budget permit the analyst to understand how farmers might react to
changes in agricultural prices or technologies in light of their farming options. Graphs are used to compare
the revenues, costs, and profits for the major commodities. Sensitivity analyses are used to compare the
relative profitability of the different commodities under varying price scenarios.
10
CHAPTER 3: FARM BUDGETS AT SOCIAL PRICES
The preceding commodity budgets were based on private prices, those that farmers face in the market
place. In many instances, private prices do not reflect the true scarcity value of a good to the economy.
Market failures and policy interventions may drive a wedge between the true opportunity cost, or social
price of a good, and the observed market price. For example, an overvalued exchange rate may decrease
the cost of tradable inputs (such as fertilizers or machinery) and tradable outputs (such as corn). In such
cases, social prices diverge from private prices, thus altering the relative profitability of various economic
activities.
Because they are not directly observed, social prices must be estimated from other economic data. The
process can be quite elaborate, depending on the extent to which a good is traded. To simplify the initial
calculations, this chapter provides social prices for the tradables and nontradables needed to set up the
basic PAM discussed in Chapter 2 of Monk and Pearson). The process of calculating those social prices
and the sensitivity of those prices to economic policies are discussed in M-P’s Chapter 6.
Adding Social Prices
The first step in adding social prices is to retrieve the workbook saved at the end of the last chapter
(chap2.xls). Insert a new worksheet and rename it S-Budget. Select Table 2.2 under the P-Prices tab, copy
and paste into the upper left hand corner of the new worksheet, i.e., into S-Budget. Change the table name
and enter the data shown in Table 3.1.
As with previous examples of price data, copy the same entries in Column C (High Yield, Wet Season) into
columns that represent other cropping activities. Prices are the same for all columns including Land (see
below). Note that many of the output prices differ and will need to be entered separately.
Table 3.1: Social Prices for Additional Commodities
S-Prices
High Yield Paddy Rainfed
Quantities
Wet
Irrigated
Paddy
Rainfed
Soybeans
Corn
Fertilizer (Rp/kg)
Urea
304
304
304
304
KCL
326
326
326
326
7,093
Chemicals (Rp/kg)
7,093
7,093
7,093
Seed (Rp/kg)
387
387
219
254
Fuel (Rp/liters)
365
365
365
365
Seedbed Prep
237
237
237
237
Crop Care
215
215
215
215
Harvesting
200
200
200
200
Threshing
200
200
200
200
Shelling
200
200
200
200
Drying
200
200
200
200
30%
Labor (Rp/hr):
Capital:
Working Capital (%)
30%
30%
30%
Tractor Services (Rp/hr)
493
493
493
493
Thresher (Rp/hr)
650
650
650
650
0
0
0
0
(Rp/kg)
355
355
502
151
Land (Rp/ha)
11
Note that the Land price is 0. In the absence of clearly specified cropping alternatives, imputing social
opportunity costs to fixed factors within a single commodity budgeting framework is arbitrary. Consequently, the land price, and thus cost, equals 0 and all returns to land are included in the Profits residual,
i.e., Profits and Net Profits are the same. Social profits thus measure the returns to land and management
when all commodities are priced at their efficiency prices. The rationale for this approach will be examined in greater detail in a future chapter.
Constructing Farm Budgets at Social Prices.
To create the social prices budgets, Insert a new worksheet and rename it S-Budget. Copy the private budgets table (Table 2.3 under the tab P-Budget.) to the new worksheet.
Compute the cells in the social budgets table using the method employed to create the private budgets
table. Select the cell under High Yield, Wet and delete its contents. Click on the = sign in the Formula Bar.
Click on the same cell in the S-Prices worksheet. Type in an asterisk (*) and then click on the same cell in
the I-O table (Table 2.1 under P-Budgets). The result of the multiplication will be the cost of Urea per hectare.
Table 3.2: Additional Budgets at Social Prices
S-Budgets
High Yield Paddy Rainfed
Quantities
Wet
Irrigated
Paddy
Rainfed
Soybeans
Corn
Tradables Fertilizer (Rp/ha)
Urea
60,800
76,000
60,800
91,200
KCL
32,600
24,450
0
13,040
67,384
60,291
28,372
56,744
Seed (Rp/ha)
13,545
13,545
10,950
8,890
Fuel (Rp/ha)
23,360
0
5,840
0
Chemicals (Rp/ha)
Factors
Labor (Rp/ha)
Seedbed Prep
47,400
59,250
33,180
11,850
Crop Care
178,450
204,250
144,910
55,900
Harvesting
55,000
45,000
30,000
40,000
Threshing
30,800
25,000
12,000
18,600
Shelling
0
0
19,000
0
Drying
4,800
4,800
12,000
0
Working Capital (Rp/ha)
123,900
76,200
40,500
36,300
Capital
Tractor Services (Rp/ha)
8,874
0
0
0
Thresher (Rp/ha)
61,750
26,000
42,250
0
0
0
0
0
Land (Rp/ha)
Output
Total Revenue (Rp/ha)
2,218,750 1,508,750
Total Costs (excluding land) (Rp/ha)
602,400 453,000
708,663
614,786
439,802 332,524
Profits (excluding land) (Rp/ha)
1,510,088
893,965
162,598 120,476
Net Profits (including land) (Rp/ha)
1,510,088
893,965
162,598 120,476
12
Check to be sure that the correct cells have been multiplied, then copy the formula into all rows including
Total Revenue. When that has been completed successfully, copy the High Yield, Wet column into the columns representing other activities. To compute Total Costs, sum the entries from Urea to Thresher, then
copy the formula into the other columns. Compute Total Profits by subtracting Total Costs from Total Revenues; copy the formula into the other columns.
Save the spreadsheet as chap3.xls. Save again to produce chap3.bak
13
CHAPTER 4: THE POLICY ANALYSIS MATRIX
A Brief Introduction to PAMs
The calculation of private profitability provides information on the competitiveness of commodity systems
at actual market prices. The same computations using social prices provide information on profitability
when commodities and factors are priced at their social opportunity costs. The divergences -- the differences between private and social valuations -- are caused either by policy interventions (in the form of
taxes, subsidies, trade restrictions, and exchange rate distortions) or by failures in commodity and factor
markets.
The Policy Analysis Matrix (PAM) compares the data from the private and social budgets to facilitate the
evaluation of policy effects and market failures on tradable inputs, domestic resources, and outputs.1 The
PAM format, shown in Table 4.1, contains data on revenues, costs, and profits for an individual crop at private and social prices.
Table 4.1. The Policy Analysis Matrix
Costs
Revenues
Tradable Inputs Domestic Factors
Private Prices
A
B
C
Social Prices
E
F
G
Divergences
I
J
K
Profits
D
H
L
Private profits: D = A - B - C
Input transfers: J = B - F
Social profits: H = E - F - G
Factor transfers: K = C - G
Output transfers: I = A - E
Net transfers: L = D - H
L= I - J - K
The PAM is made up of two accounting identities. One defines profitability, the other measures policy
effects and market failures, i.e., divergences. Profits, shown by D and H in the right column, are calculated
by subtracting all costs from revenues, in private and social terms for each respective row. Policy effects
and market failures, shown by I, J, K and L in the bottom row, are calculated as the difference between the
private and social values of outputs and inputs. The divergences represent transfers to or from the producers of the crop, resulting from policy interventions and market failures affecting revenues, tradable inputs,
or domestic factors. Such transfers may be positive or negative. The net transfer to producers of a particular crop can be calculated as the aggregate effect of divergences. The net transfer is also shown as the difference between private and social profits for the commodity system.
The final PAM table is constructed from the private and social budget tables. The top or private profits row
is obtained from the worksheet P-Budget, the private budget. The middle or social profits row is obtained
from the worksheet S-Budget, the social budget. The last row, divergences, is obtained by subtracting the
social row from the private row.
1.
Chapter 2 of Monke and Pearson provides the authoritative introduction to the logic of the Policy Analysis Matrix.
14
Creating a PAM for High Yielding, Wet Season Paddy
The first PAM exercise focuses on a single commodity system for which complete information on competing alternatives is not available. In such cases, private land costs can be obtained from the private rental
market. But, as noted earlier, in the absence of information on the social profits of competing commodities,
social returns to land are difficult to define. Consequently, in both the private and social computations,
Profits in this PAM equal Profits (Excluding Land). That is, profits represent returns to management and
land.
The first step in computing a single-commodity PAM for High Yielding Paddy, Wet is to retrieve the Excel
file saved as chap3.xls. This should contain the calculations up to and including those needed to obtain
social budgets. Insert a new worksheet in the workbook and rename it PAMs.
Label the columns and rows to create a typical PAM table. (Table 4.2 below.)
Private
Social
Divergences
Table 4.2. High Yielding W et Season Paddy PAM
Tradables
Domestic Resources
Output
Inputs
Labor
Capital
1,093,750
93,400
290,240 225,328
2,218,750
197,689
316,450 194,524
-1,125,000
-104,289
-26,210 30,804
Profits
484,782
1,510,088
-1,025,306
To compute the elements of the PAM, utilize the methods used earlier to create the budget tables. Select the
cell Private-Output cell and click on the equals (=) sign in the Formula Bar. Then click on the Total Revenue cell for High Yielding paddy in the Private Budget table (Table 2.3 under the P-Budget tab). Click on
O.K. Go do the same for the social output entry.
Completing the remaining entries requires slightly more effort. To compute the Private Inputs cell, select
the cell and begin to write the summation function in the Formula Bar by first clicking on the = sign, then
typing SUM and an open parenthesis. The completed entry is =SUM(. A dialog box will pop-up requesting
the range over which the function should sum. Click on the P-Budget tab and select the input items (Urea
through fuel) that constitute the High Yielding, Wet input costs. (If the dialog box obscures the view of the
relevant data, drag it to the bottom of the page.) Complete the formula by adding a closing parenthesis.
Then click on OK.
Use the same procedure to compute the labor inputs cell and the capital inputs cell. Select the cell to be
completed, click on the = sign, type SUM(, complete the range by going to the appropriate worksheet and
selecting the relevant range, in this case labor and capital, typing in a closing parenthesis, and clicking on
OK.
Once data from the budget tables have been entered for Table 4.2, the profits column and the divergences
row can be computed. To complete the profits column, subtract the sum of the Inputs, Labor, and Capital
cells from the Output cell. To compute the divergences row, subtract social entries from private entries.
Remember to utilize the copy command as much as possible.
Questions
15
Interpret the results of the high productivity, wet season paddy PAM. To what extent do policies affect
paddy prices? What about input subsidies?1
The negative divergence in tradable outputs indicates that farmers are receiving less than the social value
for their crop. They are, in effect, being taxed by the amount of the divergence. The negative divergence in
tradable inputs reflects a subsidy to farmers for use of these inputs. Farmers do not pay the full social cost
of these inputs and the divergence represents the cost to the government. This somewhat offsets the effect
on farmers of the divergence in tradable outputs. The higher social cost of labor is the result of the female
labor component. Since women are paid less than the marginal product of their labor, private wages are
lower than social ones for tasks performed primarily by women. The difference between the private and
social interest rate causes the divergence in the capital column.
Single Commodity PAMs for Irrigated Soybeans and Rainfed Corn
Single commodity PAMs for irrigated soybeans and corn can be generated quickly by employing the
notion of absolute cell addresses. A cell address is rendered absolute when the row and column address is
preceded by a $ sign. For example, the cell address A1 would be $A$1. If this address is copied, it does not
change to reflect a different position on the spreadsheet, but retains its abolute value, i.e., A1.
To utilize this feature in computing additional PAMs, convert the data cell address in Table 4.2 to absolute
values, e.g., outputs, inputs, domestic resources. Click on the address in the formula bar and then press F4.
The requisite dollar signs will appear.
After having converted Table 4.2 data cell address to absolutes, copy the table below itself and label it
Table 4.3. Soybean PAM. Note that the numbers in the table are still the same because the addresses refer
to the same absolute cells. The calculated cells are making the same computations.
To compute the correct numbers for the Soybean PAM table, click on the P-Budget tab and observe that the
Soybean activity is contained in column G. Convert the B in the formula of the copied table to G and the
result will be the correct value for the first element in the Soybean PAM. Do the same for the remaining
data cells and the Soybean PAM (Table 4.3) will be complete.
Private
Social
Divergences
Table 4.3 Soybean PAM
Tradables
Domestic Resources
Output
Inputs
Labor
Capital
672,000
86,800
228,540 102,250
602,400
105,962
251,090 82,750
69,600
-19,162
-22,550 19,500
Profits
254,410
162,598
91,812
Create the Rainfed Corn PAM using the same procedure. The Soybean PAM will show absolute values for
its cell address so it may be copied without additional preparation. Copy it below itself and label it Table
4.4. Rainfed Corn PAM. Change the letter addresses to I (Rainfed Corn data is contained in Column I of
the Budget tables.) A completed Table 4.4 is shown below.
1.
Chapter 12, pp. 226-236, of Monke-Pearson provides detailed interpretations of a number of PAMs that can
serve as models for interpreting the high productivity paddy PAM.
16
Private
Social
Divergences
Table 4.4. Rainfed Corn PAM
Tradables
Domestic Resources
Output
Inputs
Labor
Capital
450,000
85,400
109,840 36,300
453,000
169,874
126,350 36,300
-3,000
-84,474
-16,510
0
Profits
218,460
120,476
97,984
A Farming Systems PAM
The three previous PAMs were created under the assumption that the social opportunity cost of land could
not be identified. However, soybeans compete for the same land as rainfed paddy and rainfed corn. Examination of the Profit figures for rice show it to be superior to soybeans. This point is best demonstrated by
creating a soybean PAM that includes a social cost for land in the form of the "next best alternative."
To create such a farming systems PAM for Soybeans, first copy Table 4.3. Soybean PAM below the Rainfed Corn PAM table and label it Table 4.5 Soybean PAM (Farming Systems). Then add an additional column and label it Land indicating that an effort will be made to disaggregate Profits into a return to Land
and a return to management. This step is required to obtain a correct understanding of comparative advantage within the farming system.
The entry in the Private-Land cell comes from the cost of Land in the Private Budget table. Select the cell
in which the entry is to be made, click on =, then click on the Private Budget tab (P-Budget) and click on
the cost of land cell in the Soybean column.
Calculate the social cost of land by referencing the cell that represents the highest value for Profits
(Excluding Land) of the crops that compete directly for agricultural resources with soybeans. In this case,
the crop is rainfed paddy. This value represents the opportunity cost of land to soybean growers
because it describes what the returns to land would have been if it had been used in the next best
alternative.
To add the next best alternative (rainfed paddy) to Table 4.5, select the destination cell, click on the = sign,
then click on the social budgets tab (S-Budgets). Locate the cell containing the Profits for Rainfed Paddy.
Click on the cell and then click on OK. Complete the table by dragging the Divergences formula from Capital into the Land column.
Private
Social
Divergences
Table 4.5. Soybean PAM (Farming System)
Tradables
Domestic Resources
Output
Inputs
Labor
Capital
672,000
86,800
228,540 102,250
602,400
86,800
251,090 82,750
69,600
0
-22,550 19,500
Save the workbook as chap4.xls. Save again to create chap4.bak.
Questions
17
Land
225,000
893,965
-668,965
Profits
29,410
-712,205
741,615
1. Examine the resulting soybean PAM. Interpret the results from the perspective of private incentives. Is it
profitable for farmers to grow soybeans? Where are the incentives for soybean production coming from?
2. Is soybean production socially profitable if within agriculture efficiency is considered, i.e., the opportunity cost of land is included as a domestic resource cost? What inferences can be drawn about the functioning of land markets on the basis of the evidence from the PAM?
18
CHAPTER 5: COMPUTING SUMMARY RATIOS
To compare the profitability and efficiency of different crops, a common numeraire must be used throughout the analysis. The use of ratios is a convenient method of avoiding the problem of a common numeraire,
particularly when the production processes and outputs are very dissimilar. Several useful ratios that provide information on private and social profitability can be derived directly from the data in the policy analysis matrix. Both the numerator and the denominator of each ratio are PAM entries defined in domestic
currency units per physical unit of the commodity. Therefore, the ratio is a pure number free of any commodity or monetary designation.1
In this part of the exercise, the results from the previous PAMs will be used to calculate the nominal protection coefficient (NPC), the effective protection coefficient (EPC), and the domestic resource cost
coefficient (DRC). The ratios will be calculated in a summary table so that the results can be compared
easily between crops. The summary table is also convenient for conducting sensitivity analysis on the
results.
To create the summary table, Insert a new worksheet in the workbook and rename it Ratios.
The Ratio Table
The summary table consists of four rows: high yielding paddy (wet), rainfed corn, irrigated soybeans
(alone), and irrigated soybeans (system). The NPC, EPC, and DRC ratios appear in the columns. (The
nominal protection coefficient is calculated separately on outputs and inputs in this example.) See Table
5.1 for the suggested format.
The Nominal Protection Coefficient (NPC)
The bottom row of the PAM indicates the extent of commodity and factor market divergences in the production of each crop. In the absence of market failures, this row measures the effects of distorting policy on
inputs and outputs. The nominal protection coefficient, defined by the ratio of private commodity prices
and social commodity prices, compares the impact of government policy (or of market failures that are not
corrected by efficient policy) between different crops.2
• Calculate the NPC for tradable outputs (i.e., crop output) for each commodity shown in
Table 5.1 from its corresponding PAM using the formula:
NPCO =
R evenue in P rivate P rices
R ev en ue in S o cial P rices
• Select the cell to be completed, click on the = sign, then on the PAM tab. Click on the private output cell, type in /, then click on the social output cell. Click on OK. Utilize the same
method to compute the NPCI.
1
For a more detailed discussion of various summary ratios including the DRC, see M-P pp. 25-29.
2
"Efficient" policies are interventions deliberately introduced to offset market failures. For a discussion of policies that promote food security in developing countries where imperfect capital and insurance markets make it difficult to obtain a desired protection against risk, see M-P, pp. 53-54.
19
An NPC for tradable outputs greater than 1 shows that the market price of the output exceeds the social
price. The farmer receives an implicit output subsidy from policies affecting crop prices.
• Calculate the NPC for tradable inputs for each commodity shown in Table 5.1 from its corresponding PAMs.
NPCI =
Cost of Tradable Inputs in Private Prices
Cost of Tradable Inputs in Social Prices
An NPC for tradable inputs less than 1 indicates that market prices of inputs fall below the price that
would result in the absence of policy. This ratio reveals the presence of input subsidies, taxes, trade restrictions or an inappropriate exchange rate.
Table 5.1. Summary Ratios
Ratios of protection and efficiency
NPC
Outputs
Inputs
High-Yield Paddy (wet, single commodity)
0.493
0.472
Soybean (single commodity)
1.116
0.819
Rainfed Corn (single commodity)
0.993
0.503
Soybean (farming system)
1.116
0.819
EPC
0.495
1.179
1.288
1.179
DRC
0.253
0.672
0.574
3.005
The Effective Protection Coefficient (EPC)
The effective protection coefficient, defined as the ratio of value added in private prices to value added in
social prices, more completely measures incentives to farmers. The EPC indicates the combined effects of
policies in the tradable commodities markets. This is a useful measure because input and output policies,
such as commodity price supports and fertilizer subsidies, often constitute part of a comprehensive policy
package. For example, governments frequently reduce the price of outputs but then subsidize inputs in an
effort to encourage the adoption of new technology.
•
Calculate the EPC cell in Table 5.1 for each of the commodities using the formula:
EPC = (Revenue - Cost of Tradable Inputs) in Private Prices
(Revenue - Cost of Tradable Inputs) in Social Prices
• To compute the values for the EPC cells, use the methods described earlier for computing
the values for the NPCs. Select the cell, click on =, click on the PAMs tab, and complete the
formula.
An EPC greater than 1 indicates positive incentive effects of commodity policy (a subsidy to farmers)
whereas an EPC less than 1 shows negative incentive effects (a tax on farmers). Both the EPC and the
NPC ignore the effects of transfers in the factor market and therefore do not reflect the full extent of incentives to farmers.
The Domestic Resource Cost Coefficient (DRC)
20
The domestic resource cost coefficient measures the efficiency, or comparative advantage, of crop production. If the social returns to land cannot be identified clearly because full information about alternatives is
lacking, the DRC may be calculated with respect to labor and capital only. The DRC serves as a proxy
measure for social profits. It is calculated by dividing the cost of labor and capital by value-added at social
prices. From Table 3.1, the DRC equals G/(E-F).
•
Calculate the DRC for the single commodities as:
(Labor Cost+ Capital Cost) in Social Prices
DRC =
(Revenues- Cost of Tradable Inputs) in Social Prices
Where the opportunity cost of land can be clearly identified, the DRC is calculated by including the cost of
land (i.e., the social profitability) of the next best alternative crop. The resulting DRC reflects the country's
comparative advantage, not only with respect to capital and labor, but within agriculture as well.
•
Calculate the DRC for the farming system as:
DRC =
(Labor Cost+ Capital Cost + Land Cost) in Social Prices
(Revenues- Cost of Tradable Inputs) in Social Prices
Use the methods described above to compute the values for Table 5.1 under the Ratios tab.
The DRC will be positive unless the social value added in crop production is negative. However, DRCs
greater than one indicate that the value of domestic resources used to produce the commodity exceeds its
value added in social prices. Production of the commodity, therefore, does not represent an efficient use of
the country's resources. DRCs less than one imply that a country has a comparative advantage in producing the commodity. Values less than one mean that the denominator (value added measured at world
prices) exceeds the numerator (the cost of the domestic resources measured at their shadow prices).
Save the spreadsheet as chap5.xls. Save again to create chap5.bak.
Sensitivity Analysis
The stage has now been set to examine the sensitivity of these production systems to alternative assumptions about output, input, and domestic factor prices. Examine the impact of the effects among crops if:
1)The market price for all fertilizers is raised to Rp200/kg.
2)The market price for soybeans is lowered to Rp380/kg.
3)The market price for corn is doubled.
4)The yield for corn is doubled.
21
5)Social prices (reflected by changes in international markets) for paddy and soybeans double.
6)Determine the "break-even" world price for output that either gives or removes each crop's comparative advantage.
22
CHAPTER 6: ESTIMATING SOCIAL PRICES
Chapter 3 provided a ready-made set of social prices that were used to illustrate PAM computations. In
most cases, however, analysts will be required to compute the social prices for both tradables and nontradables. This chapter shows how to calculate the import and export parity prices that measure social prices
for tradable inputs and outputs.
Social prices are calculated on the basis of the opportunity cost, or most profitable alternative, of inputs
and outputs. For tradable inputs and outputs, social prices are derived from prices in international markets.
Estimation of social values for nontradable goods and domestic factors is more difficult and requires
detailed knowledge of individual factor markets (see Chapter 8).1
This chapter discusses import and export parity prices and details the computation of social prices for the
tradables (linked back to the Social Prices table constructed in Chapter 3).
Social Prices for Tradable Goods
The social price of a tradable output or input at the wholesale market nearest to the farm gate equals the
international or border price adjusted for exchange rates and domestic transportation, processing, and marketing costs. The resulting farm gate prices are called import and export parity prices or sometimes border
price equivalents. They are computed in the following steps:
Determining International Commodity Prices.
Determining an international price for the commodity can be done in several ways. The simplest way, if
the data are available, is to consult the country's trade statistics. For imports, the appropriate measures are
the so-called c.i.f. prices.2 They often can be obtained by dividing the value of the imported commodity by
the quantity imported. For exports, the appropriate values are f.o.b. prices, computed in the same way.3
Using local sources may be misleading, however, when only limited amounts have been traded or trade has
taken place under special concessional circumstances. In this case, the alternative is to use quotes from a
major international market in which a large volume of the good is traded, adjusted for international shipping. Data on insurance and freight can be obtained from shipping companies or freight forwarders.
1
Important references for the computations made in this chapter are contained in Chapter 11 of the M-P text. Pages
188-199 deal with the calculation of domestic import and export parity prices when starting with the prices in international markets. That section also contains a discussion of the implications of over- or undervalued exchange rates for
establishing the prices of tradables in domestic currency. Pages 199-209 address the difficult question of how to estimate social prices of factors, i.e., of domestic resources.
2 C.i.f. prices include the cost of the commodity in the exporting country plus the insurance and freight required to move it from
the point of export to the harbor of the importing country. Consequently, "border" prices have traditionally meant "at the border"
and do not include the handling cost required to move goods from the boat to the dock of the importing country. The latter distinction is rendered meaningless in the case of truck, rail, and air transport.
3
F.o.b. (free on board) prices are measured on the boat in the harbor of the exporting country.
23
The computation of import parity prices using international market sources begins with the f.o.b. price at
the border of the reference country, usually a major exporter. Insurance and freight are added to obtain the
c.i.f. price in the importing country. Export parity prices can be obtained in a similar fashion. In this case,
however, the reference is the border of major importers. Insurance and freight are subtracted to arrive at
f.o.b. prices at the local border.
Determining an Exchange Rate.
Converting prices expressed in international currency to their domestic currency equivalent requires an
appropriate foreign exchange rate. The official exchange rate can be used in the calculations only if it
accurately reflects the true scarcity value of foreign exchange. In many developing countries, the official
foreign exchange rate is overvalued and foreign exchange is rationed through a system of exchange controls. Hence, the exchange rate must be adjusted to reflect the true "willingness of the economy to pay" for
tradable goods and services.
When the equilibrium foreign exchange rate (EER) -- the social price that reflects the true value of foreign exchange -- differs from the official exchange rate, the difference can be expressed as a foreign
exchange premium. For example, if the official exchange rate is overvalued by 10 percent, the shadow
exchange rate equals the official rate times (1+.1).1 Once an EER is selected, international prices can be
converted to local currency by multiplying the international price times the equilibrium exchange rate.
Converting Weights of Locally Traded Units.
Often the units of international trade differ from those traded locally. In the current example, domestic
prices have been quoted on a per kilo basis, while those for international trade are often quoted per metric
ton. The appropriate ratio must be established to convert the international units into locally meaningful
measures.
Determining the Costs of Distribution.
The fourth step in computing the value of a commodity at the farm gate requires costing the marketing
(transportation, storage, and processing) activities that link the border to the nearest wholesale market and
the farm. The computation can be broken into two parts. For imports, the first part consists of adding the
costs of activities between the border and the wholesale market where the farmer sells or purchases the
commodity; imports cost more as they move from the border inland. For exports, the reverse is true.
Transportation and processing costs between the wholesale market and the border are subtracted; exports
are worth less at the wholesale market than they are at the border.
The second part of the computation involves the link between the wholesale market and the farm gate. In
the case of imports, the calculation depends on whether the commodity is an output or an input. For
imported outputs, the c.i.f. value of the commodity at the wholesale market is too high because it does not
take into account the cost to the farmer of bringing his goods to market. Hence, the farm to wholesale distribution costs must be subtracted. For imported inputs, the opposite is true. Inputs must be transported to
the farm, and, hence, distribution costs must be added to the wholesale price to obtain a farm gate price.
1
The discussion on the top of page 197 in M-P regarding exchange rate adjustments to factor prices represents a
long-run view. A more complete discussion of equilibrium exchange rate computation when partial equilibrium
methods are being used is contained in Isabelle Tsakok, Agricultural Price Policy, Cornell University Press, 1991.
24
For exports, farmers must incur the cost of taking the commodity to market, thereby reducing the value of
the commodity at the farm gate relative to its price in the wholesale market.
The major steps involve in computing import and export prices are summarized in Table 6.1.
Because post-farm goods and services are nontraded, the costs of transportation and processing are locally
determined. Even in the absence of trade policies or market imperfections, private costs may not equal
social costs. Transportation and processing facilities may have a high import content in the form of equipment, fuel, parts, etc. If the country maintains an overvalued exchange rate, these imports cost less than if
equilibrium exchange rate had prevailed. Therefore, the cost of nontraded goods and services must be
decomposed into their traded input and nontraded domestic factor components. Chapter 6 illustrates such
a decomposition and links the results to cells in the Social Prices table to permit sensitivity analysis.1
However, for simplicity, this chapter assumes that the private costs of nontraded goods and services such
as transportation and marketing provide reasonable estimates of their social costs.
1
In Chapter 8, "Constructing PAMs for Commodity Systems," Monke and Pearson point out that focusing the PAM
analysis entirely on the farming system may be quite misleading. When assessing the competitiveness and efficiency
of a commodity system, it may be equally or even more important to investigate the policy interventions and market
imperfections associated with transportation, processing, and marketing. If there are significant divergences between
private and social profits in these elements of the commodity system, estimates for private and social profits at the
farm gate will be biased.
25
Table 6.1. Determining Import and Export Parity Prices
Step
Import Parity Prices
STEP
International Prices
DATA
Export Parity Prices
PROCESS
DATA
PROCESS
F.o.b. price at point of export
Given
C.i.f. price at point of
import
Given
Freight to point of import
Given
Freight to point of export
Given
Insurance
Given
Insurance
Given
C.i.f. at point of import
F.o.b + Freight +
Insurance.
F.o.b. at point of export
C.i.f - Freight Insurance
Foreign exchange rate
Given
Foreign exchange rate
Given
Foreign exchange premium
Given
Foreign exchange premium
Given
Equilibrium exchange rate
ER * (1 + ERP)
Equilibrium exchange
rate
ER * (1 + ERP)
C.i.f. in domestic currency
EER * C.i.f at point
of import
F.o.b in domestic currency
EER * F.o.b. at
point of export
Weight conversion factor
Given
Weight conv. factor
Given
C.i.f. in dom. curr. and weight
C.i.f. in dom. curr. /
Weight conversion
factor
F.o.b. in dom. curr. and
weight
F.o.b. in dom.
curr. / Weight conversion factor
Local transport & mkting costs
to wholesale mkt, in social
prices
Given
Local transport & mkting
costs to wholesale mkt,
in social prices
Given
Value before processing
C.i.f. in dom. curr.
and weight + distrib. costs.
Value before processing
F.o.b. in dom.
curr. and weight distrib. costs.
Processing conv. factor
Given
Processing conv. factor
Given
Import parity value at wholesale market
Value before processing * conversion factor
Export parity value at
wholesale market
Value before processing * conversion factor
Distribution between
wholesale & farm gate
Transport, marketing, & storage costs to farm, in social
prices
Given
Transport, marketing, &
storage costs to farm, in
social prices
Given
Result
Import parity value at farm gate
Import parity value
at wholesale market +/- distr. costs
to farm gate
(Deduct if output;
Add if input)
Export parity value at
farm gate
Export parity
value at wholesale market - distr.
costs to farm gate
Currency Conversions
Weight Conversions
Distribution between
port & wholesale market.
26
Determining Import Parity Prices
The purpose of the following exercise is to demonstrate how to calculate the import parity prices for an
imported output. The price of imported rice from Bangkok will serve as a starting point for deriving the
import parity price for paddy in Indonesia.
Preparing the Import Parity Table.
Retrieve chap5.xls. Resave as chap5.bak. Insert a new worksheet and rename it S-Parity. Create Table 6.2.
The data to be used, and the required intermediate calculations, are shown below:
•
•
•
•
•
•
•
•
•
F.o.b. Bangkok price of rice (35% brokens) equals $287/ton
Insurance and freight costs from Bangkok to Jakarta equal $17.50/ton.
Official exchange rate $1 = Rp1644
Foreign exchange premium = 10%
Conversion from tons to kilograms: 1000 kg = 1 ton
Transportation costs from port to wholesale market equal Rp5/kg
Handling costs from port to wholesale market equal Rp7/kg
Processing conversion factor from paddy to rice: 1 kg paddy = .64 kg rice
Wholesale to farm distribution costs = Rp5/kg
Assume for the purposes of constructing the import and export parity price tables that there are no distortions in the marketing sectors so that private and social prices are equal.
Deriving the Import Parity Price for Paddy in Jember.
Calcuations for the actual import parity prices at the port of Jember in Indonesia are shown in Table 6.2.
(Data are drawn from the assumptions shown above.) Derive the intermediate values based on assumptions
given above and the key conversions needed to transform the international price ($/ton) into a comparable
domestic farm gate price (Rp/kg), as described in Table 6.1.
• Calculate the C.i.f. price for rice at the Indonesian port:
C.i. f. at point of import = F.o. b. price at point of export
+ Freight costs
+ Insurance costs
•Calculate the Equilibrium exchange rate:
Exchange rate * (1 + Exchange rate premium)
•3. Convert international prices in dollars ($) to local currency (Rupiah).
C.i. f. in domestic currency = C.i. f. at point of import
* Equilibrium exchange rate
• Convert the unit of measure from tons, the usual international price unit, to kilograms.
27
C.i.f.( Rp / kg) =
C.i.f.( Rp / ton)
1000
• Add distribution costs between the port and the wholesale market to the weight-adjusted c.i.f.
price.
• Multiply "before processing" cost by the processing conversion factor.
• Adjust for the cost of distributing the commodity from the wholesale market to the farm gate.
Because paddy is an output, the costs of distribution between the wholesale market and farm gate
are deducted from the import parity value at the wholesale market.
Table 6.2. Calculation of the Social Import Parity Price of Paddy
F.o.b. ($/ton)
287
Freight & Insurance ($/ton)
17.5
C.i.f. Indonesia ($/ton)
304.5
Exchange rate (Rp/$)
1,644
Exchange rate premium (%)
10%
Equilibrium exchange rate (Rp/$)
1808.4
C.i.f. in domestic currency (Rp/ton)
550,658
Weight conversion factor (kg/ton)
1000
C.i.f. in dom. curr. (Rp/kg)
550.7
Transportation costs (Rp/kg)
5
Marketing costs (Rp/kg)
7
Value before processing (Rp/kg)
562.7
Processing conversion factor (%)
0.64
Import parity value (Rp/kg)
360.1
Distribution costs to farm (Rp/kg)
5
Import parity value at farm gate (Rp/kg)
355.1
Determining Export Parity Prices
The social export parity price is the border price of an exportable good adjusted for transport and handling
costs and revalued by the EER. The calculations for the export parity price resemble those for the import
parity price, but generally work in the opposite direction. Follow the steps outlined in Table 6.1 to calculate the social price of corn in Padang, assuming that corn is an exportable good.
Create a new table under the S-Parity tab for the export parity price by copying the Import table down the
diagonal of the existing spreadsheet. Take care to edit the labels to resemble those illustrated in Table 6.2.
Data and Assumptions for Table 6.3.
•
•
•
•
C.i.f. U.S. Gulf price for no. 2 yellow corn = $115/ton
Costs of insurance and freight between the U.S. and Jakarta = $17.50/ton
Official exchange rate: $1 = Rp1644
Foreign exchange premium = 10%
28
• Transportation costs from port of Jakarta to wholesale market = Rp7/kg.
• Handling costs from port to wholesale market = Rp8/kg.
• Conversion of weights: 1000 kilograms = 1 ton
• Farm to wholesale distribution costs= Rp10/kg
A conversion factor is not necessary for processing corn because the commodity is sold on international
markets in an unprocessed form.
Deriving the Export Parity Price for Corn in Padang.
Derive the intermediate values based on the assumptions given above and the steps described in Table 4.1.
Several of the cell formulas must be modified to account for the difference between an imported output and
an exported output.
Table 6.3. Calculation of the Social Export Parity Price of Corn
C.I.f. ($/ton)
115
Freight & Insurance ($/ton)
17.5
C.i.f. Indonesia ($/ton)
132.5
Exchange rate (Rp/$)
1,644
Exchange rate premium (%)
10%
Equilibrium exchange rate (Rp/$)
1808.4
C.i.f. in domestic currency (Rp/ton)
239,613
Weight conversion factor (kg/ton)
1000
C.i.f. in dom. curr. (Rp/kg)
239.6
Transportation costs (Rp/kg)
5
Marketing costs (Rp/kg)
7
Value before processing (Rp/kg)
251.6
Processing conversion factor (%)
0.64
Import parity value (Rp/kg)
161.0
Distribution costs to farm (Rp/kg)
10
Import parity value at farm gate (Rp/kg)
151.0
Linking Tables in the Spreadsheet
Link the results of the import and export parity price calculations directly into the Social Prices table, overwriting the initial (and not always identical) values entered in Chapter 3.
Note the cell addresses for the import parity price of rice and the export parity price of corn.
Move to the Social Prices under the S-Budget tab and type the appropriate cell addresses into the rows for
paddy and corn. In the case of paddy, type an absolute cell address (e.g., =$A$1) into the High Yielding,
Wet cell and copy the formula into the rainfed paddy columns. A single address also can be used for corn
grown in high yielding and rainfed areas.
Save the workbook as chap6.xls. Repeat the save to produce chap6.bak.
Sensitivity Analysis
29
The spreadsheet is now fully integrated so that sensitivity analysis on international prices and exchange
rates can be reflected in the social budgets. How does the social profitability for the paddy and corn systems change when:
1) The exchange rate premium rises to 30%? Falls to 0% (i.e., the official exchange rate equals the
equilibrium exchange rate)?
2) The international price of rice rises to $320/ton? Falls to $215/ton?
3) The international price of corn falls to $95/ton?
The Import and Export Parity Prices tables assume an exchange rate premium of 10 percent, which means
that the exchange rate is overvalued by 10 percent. Although many developing countries experience overvalued exchange rates, it is often difficult to ascertain the exact amount of the premium. Hence, it is desirable to test the results of different EER assumptions.
Summary
This chapter reviewed the process for calculating the social prices of tradable commodities. Data are
required for international commodity prices, distribution costs between various stages of the marketing
chain, exchange rates, weight conversions and processing factors. The steps involved in transforming
these data into parity prices were outlined in Table 6.1. Distinctions were drawn between the calculations
for imported outputs, imported inputs, and exports of both outputs and inputs. For purposes of illustration,
sample data were provided for only two of these categories, permitting the construction of tables for paddy
(occasionally an imported output) and corn (occasionally an exported output). The import and export parity prices so derived are the social prices faced by farmers. To test the effects of changes in international
prices and exchange rates on social profitability, these results were linked to the original Social Prices table
constructed in Chapter 3.
Although the computations are straightforward, data requirements are often formidable. For example, in
identifying the f.o.b. and c.i.f. prices in international markets, it is usually difficult to ensure equivalence in
specifications (e.g., quality) between the traded product and the domestically available product. Even
small mistakes in establishing the comparability of products can swamp large errors in input-output coefficients.
30
CHAPTER 7: COMPUTING ADDITIONAL PARITY PRICES
In the Indonesian farming systems represented by these data, farmers face international competition from
imports of paddy and soybeans. Several inputs are also imported: KCL fertilizer, chemicals, paddy seed,
soybean seed, and fuel. Exports to other countries in the region include urea in addition to corn. Because
it has an international price, corn seed is potentially tradable. For the purposes of this exercise, both import
and export parity prices for corn seed will be calculated.1
In this chapter, the Import and Export Parity Price tables will be expanded to include these additional
imported outputs, imported inputs, and exported inputs. Most of the derived parity prices will be linked to
the Social Prices table.
The steps for calculating import and export parity prices in this chapter follow directly from the previous
chapter. The assumptions concerning domestic distribution costs remain provisional; they will be re-evaluated in Chapter 8.
Import Parity Prices
Insert a new worksheet and rename it S-Additional for Additional Social Parity Prices. Return to Table 6.2
(S-Parity tab) and copy it to the newly created Additional worksheet. Name it Table 7.1 Import Parity
Prices for Outputs. Add two additional columns for Paddy (Dry) and Soybeans. Both commodities are
imported.
Table 7.1 Import Parity Prices for Outputs
Output
Paddy (wet) Soybeans
F.o.b. ($/ton)
287
246
Freight & Insurance ($/ton)
17.5
15.5
C.i.f. Indonesia ($/ton)
304.5
261.5
Exchange rate (Rp/$)
1,644
1,644
Exchange rate premium (%)
10%
10%
Equilibrium exchange rate (Rp/$)
1808.4
1808.4
C.i.f. in domestic currency (Rp/ton)
550,658
472,897
Weight conversion factor (kg/ton)
1000
1000
C.i.f. in dom. curr. (Rp/kg)
550.7
472.9
Transportation costs (Rp/kg)
5
5
Marketing costs (Rp/kg)
7
7
Value before processing (Rp/kg)
562.7
484.9
Processing conversion factor (%)
0.64
1
Import parity value (Rp/kg)
360.1
484.9
Distribution costs to farm (Rp/kg)
5
5
Import parity value at farm gate (Rp/kg)
355.1
479.9
Create a second table to compute the import parity price of inputs by copying Table 7.1 below itself.
1
While corn is an export commodity, corn seed is neither exported nor imported in this example. Its export parity
price is lower than its private price while its import parity price is higher than its private price. Its import parity value
and export parity value at the farm level are both calculated and shown to demonstrate this case. In such circumstances, the private price is equivalent to its social price if there are no divergences in production or consumption.
31
Add two columns and provide the data and headings shown in Table 7.2.
Table 7.2. Import Parity Prices for Inputs
Chemical PaddySeed SoySeed CornSeed Fuel
F.o.b. ($/ton)
3750
187
453
116
182
Freight & Insurance ($/ton)
163
17.5
15.5
14.86
10.4
C.i.f. Indonesia ($/ton)
3913
204.5
468.5
130.86
192.4
Exchange rate (Rp/$)
1,644
1,644
1,644
1,644
1,644
Exchange rate premium (%)
10%
10%
10%
10%
10%
Equilibrium exchange rate (Rp/$)
1808.4
1808.4
1808.4
1808.4 1808.4
C.i.f. in domestic currency (Rp/ton)
7,076,269
369,818 847,235 236,647 347,936
Weight conversion factor (kg/ton)
1000
1000
1000
1000
1000
C.i.f. in dom. curr. (Rp/kg)
7076.3
369.8
847.2
236.6
347.9
Transportation costs (Rp/kg)
5
5
5
5
5
Marketing costs (Rp/kg)
7
7
7
7
7
Value before processing (Rp/kg)
7088.3
381.8
859.2
248.6
359.9
Processing conversion factor (%)
1
1
1
1
1
Import parity value (Rp/kg)
7088.3
381.8
859.2
248.6
359.9
Distribution costs to farm (Rp/kg)
5
5
5
5
5
Import parity value at farm gate (Rp/kg)
7093.3
386.8
864.2
253.6
364.9
In this case, pay special attention to the distinction between the imported outputs (paddy and soybeans) and
the imported inputs (urea, chemicals, paddy seed, soybean seed, corn seed, and fuel). The Import Parity
Value at the Farm Gate is calculated as the difference between the Import Parity Value at Wholesale
and Distribution Costs to Farm for outputs, whereas it is the sum of these values for inputs.
Link the import parity values for these additional imports back to the Social Prices table. Again, the use of
absolute addresses makes it easy to copy values across the table, as necessary. Do not link the import parity value for corn seed, for reasons that will become evident below.
Export Parity Prices
Copy Table 6.3 (S-Parity tab) below Table 7.2 and add two columns to the right of Corn. Label these columns Corn Seed and KCL. Copy the formulas for the export parity calculations from the "Corn" column to
the additional columns. Enter the appropriate data as displayed in Table 7.3 below to compute export parity
prices for Corn Seed and KCL.
32
Table 7.3: Computing Social Export Parity Values
Corn
CornSeed KCL
C.i.f. ($/ton)
115
101
164
Freight & Insurance ($/ton)
17.5
17.5
13.6
F.o.b. Indonesia ($/ton)
97.5
83.5
150.4
Exchange rate (Rp/$)
1644
1644
1644
Exchange rate premium (%)
10%
10%
10%
Equilibrium exchange rate (Rp/$)
1808.4
1808.4
1808.4
F.o.b. in domestic currency (Rp/ton)
176,319
151,001
271,983
Weight conversion factor (kg/ton)
1000
1000
1000
F.o.b. in dom. curr. and weight units (Rp/kg)
176.3
151.0
272.0
Transportation costs (Rp/kg)
7
7
7
Marketing costs (Rp/kg)
8
8
8
Value before processing (Rp/kg)
161.3
136.0
257.0
Processing conversion factor (%)
1
1
1
Export parity value at wholesale (Rp/kg)
161.3
136.0
257.0
Distribution costs to farm (Rp/kg)
10
10
10
Export parity value at farm gate (Rp/kg)
151.3
146.0
267.0
Link the export parity values for KCL back to the Social Prices table, using the method described in the
last chapter. Again, do not link the import parity value for corn seed.
Nontradable Good Prices
In this exercise, the seed for corn is assumed to be nontradable, though it has international prices. The reason for this is made clear by comparing its computed import and export parity prices (Tables 7.1 and 7.2) at
the farm gate level. Both international and domestic transport and handling cost differentials account for
the spread between the Rp254 import parity price and the Rp219 export parity price. Hence, even under a
free trade policy regime, this commodity will not be traded if its domestic production cost falls between
this price band. For example, if the private price of corn seed was Rp235/kg (below the import but above
the export parity prices) corn would be a nontradable. This price then serves as an approximation of the
social price, assuming no divergences in production or consumption of corn seed and that Rp235/kg is the
social marginal cost of producing corn seed.
Save the workbook as chap7.xls. Save again to obtain chap7.bak.
33
CHAPTER 8: ANALYSIS OF NONTRADABLE SERVICES
Previous chapters have ignored the issue of nontradable services such as machine rentals, transportation,
processing, and handling. Collecting data for these nontradable services is one of the most challenging,
and often frustrating, exercises in agricultural policy analysis. Because the information is difficult to collect and, once gathered, may only have a marginal impact on the results, analysts frequently resort to broad
assumptions about the data, using sensitivity analysis to verify that these assumptions would not do violence to their conclusions.
But as Monke and Pearson point out in their Chapter 10 ("Postfarm Budgets and Analysis"), market imperfections or policy divergences in nontradable goods and services should not be treated in a cavalier fashion. In theory, the costs of all nontradable inputs (goods and services) should be decomposed into their
tradable inputs and domestic factor cost components. These costs, standardized on units such as hours or
measures of volume or weight, then can be substituted into the appropriate cells of the Private and Social
prices tables. The current chapter focuses on policy divergences in the tradable component of tractor services and illustrates how these divergences affect private and social budgets.
Decomposing Tractor Costs
In Chapter 1, tractor services were considered domestic factors rather than tradable components of the
farm budget. As such, the labor associated with tractor services was included in various farming operations; the capital cost associated with these services was included in the capital account. A certain amount
of domestic labor and capital is needed to operate and maintain tractors. But the rental price of these
machines masks a significant tradable component in the form of machine depreciation, fuel, and grease and
oil.
This exercise decomposes tractor services and assigns the tradable, labor, and capital components to their
respective accounts in the private and social budgets. As with the linking of import and export parity
prices to the Social Prices table (last chapter), the steps involved in identifying the tradable portion of nontradable services are not conceptually difficult. The process of modifying the spreadsheet, however,
requires several calculations and careful adjustments to early tables.
The first step is to identify the aspects of tractor services that are tradable. In this example, the tradable
component consists of three parts -- the tractor itself, fuel, and grease and oil. The nontradable component
consists of two parts -- the use of labor for repairs, maintenance, and management operations, and the
working capital required to finance operational expenses.
Second, one needs to determine a meaningful unit of tractor use (usually taken as the tractor service hour)
and the quantity of each tradable and nontradable component used during that time. For example, how
much tractor capital is used up during one hour of tractor use (depreciation)? How much fuel is used?
Grease and oil? Labor? Capital?
Third, appropriate private and social prices for these quantities must be found. For tradables, social prices
are derived in a manner similar to that used to calculate import and export parity prices in the last chapter.
In this particular example, tractors, fuel, and grease/oil are imported and thus the calculations follow the
steps used to derive import parity prices. In general, private prices for both tradables and nontradables are
34
those observed in the market place. In this example, the private prices for tradable goods have been further
decomposed to highlight the effect of government interventions and the assumptions concerning depreciation. For nontradables, private prices are observed in the market and thus are taken as given. In both
cases, private prices are presented on a per tractor hour basis.
Once the quantities and prices for the newly defined components of tractor services have been determined,
they must be linked back into the initial budgetary calculations. The Input-Output table is expanded to
incorporate rows for tradable tractor services, tractor labor, and tractor capital. The original figures for
hours of tractor services (previously lumped under the capital account of the I-O table) are moved to the
tradables portion of the table. There they serve as the base for calculating the hours of repair and maintenance labor (R & M) used per hectare and working capital required for tractor services per hectare.
Next, similar rows are inserted in the Private Prices and Social Prices tables. Private and social price data
are linked from the table containing the various "tractor services" calculations. Once the appropriate lines
and formulas are inserted, the Private Budget and Social Budget tables recalculate automatically. Sensitivity analysis can be undertaken to evaluate the importance of decomposing the tradable components of
domestic services.
Modifications to the Spreadsheet
Step 1: Creating the Tractor Inputs Table.
Retrieve CHAPT5.XLS. Resave as CHAPT6.XLS. Insert a new worksheet, rename it Nontradables. Create a data Table 8.1 called Tractor Inputs. Enter the quantity of each of the tradable components (tractors,
fuel, grease/oil, and nontradable components (R&M labor, working capital)) used per tractor hour. The
R&M coefficient describes the amount of repair, maintenance, and administrative labor used by the vendor
to deliver one hour of tractor services. The working capital coefficient describes the amount of working
capital used by the vendor to deliver one hour of tractor services.
Table 8.1 Tractor Inputs
Items
# of Units per
Tradable Components
Tractor Hour
Tractor (hours)
1
Fuel (liters)
0.135
Grease and oil (liters)
0.0052
Nontradable Components
R&M Labor (hours)
0.015
Working Capital (Rupiahs)
500
Step 2: Creating the Tractor Prices Table
Create the Tractor Prices table below the Tractor Inputs table (see Table 7.2). It resembles the Import Parity table in structure and in arithmetic logic (i.e., the calculations are very similar). To minimize typing, it
is simplest to copy Table 6.2 under the S-Parity tab. The necessary additional labels and formulas to incorporate duties, subsidies, time conversions, and depreciation can then be added. (The labels in the social
price portion of the Tractor table are identical to those in the private portion.
35
The costs of tradable tractor services are constructed along the same lines as the commodity import parity
prices. F.o.b. prices obtained from exporting countries are the point of departure if local estimates of the
c.i.f. prices in foreign currency are unavailable. The likelihood that the latter can be found is very high
since local importers will know what their landed costs are.
Table 8.2 Tractor Prices
Private Prices
F.o.b. ($/Unit)
Freight and Insurance ($/Unit)
Social Prices
Tractor
Fuel
Grease, Oil
(machine)
(liters)
(liters)
Total
Tractor
Fuel
Grease, Oil Total
(machine) (liters)
(liters)
5000
0.2
3.4
5000
0.2
3.4
400
0.04
0.15
400
0.04
0.15
C.i.f. ($/Unit)
5400
0.24
3.55
5400
0.24
3.55
Official Exchange Rate (Rp/$)
1644
1644
1644
1644
1644
1644
Exchange Rate Premium (%)
Equilibrium Exchange Rate (Rp/$)
C.i.f. (Rp/Unit)
Domestic Duties (%)
Domestic Subsidies (%)
Import Parity at Border (Rp/tractor)
Expected Life (hours of life/tractor)
Cost per hour transportation (Rp/hr)
Transportation (Rp/unit)
0%
0%
0%
10%
10%
10%
1,644
1,644
1,644
1,808
1,808
1,808
8,877,600
395
5,836
9,765,360
434
6,420
0.4
0.4
0.3
0
0
0
0
0
0
0
0
0
12,428,640
552
9,765,360
434
25,000.00 n.a.
7,587
n.a.
497 n.a.
25,000.00 n.a.
n.a.
391 n.a.
10
1
3
Farm Gate Value (Rp/unit)
507
553
7,590
Total Tractor Service Hour (Rp/hr)
507
74.7
6,420
n.a.
n.a.
10
1
3
0
401
435
6423
0
39.5 621.1
401
59
33
493
• Calculate the Import value at border as the c.i.f. price plus the Rupiah value of domestic
duties less the Rupiah value of domestic subsidies. Because duties and subsidies are proportions,
the formula is:
• Prorate the total capital cost of the tractor over its useful life:
• Calculate the Total cost per tractor service hour for each of the tradable components as the
product of its Farm gate value and the # of units per tractor service hour (found in the Tractor Inputs table).
•She social price formulas are identical to those for private prices. So too are the data, with the
exception of the Domestic duties and Equilibrium exchange rate.
The differences between private and social costs in tractor services originate from the same sources as the
divergences in the agricultural sector. For example, many governments subsidize tractor services by permitting tractor dealers to import tractors and spare parts using foreign exchange obtained at an overvalued exchange rate. Gasoline and diesel fuel are also frequently subsidized. (No subsidies are shown in the
current example.) Conversely, imports of machines are heavily taxed to encourage and protect the domestic production especially of smaller machines like two-wheeled tractors. Imports of oil are also signifi-
36
cantly taxed instead of subsidized. For both machines and production inputs such as fuel, the degree of
taxation is somewhat offset by granting foreign exchange allocations at a cost below the equilibrium
exchange rate. The offsetting effects of an overvalued currency and import duties can be seen from the private and social price calculations in Table 6.2.
Step 3: Modifying the Input-Output, Prices, and Budget Tables
The structure of the Input-Output, Private Prices, Private Budget, Social Prices, and Social Budget tables
are each modified in an identical fashion, by inserting a new row in the tradables and labor sections. (The
capital section already includes tractor services). It is easiest to complete all structural changes on each
table before progressing to the next. A sample drawn from the I-O table is shown in Table 6.3. Consistent
with the original design of these tables, the units of measure depend on the table, and in some cases, on the
nature of the input. Apply the following steps to each of the five tables cited.
• Modify the tradables section by inserting a row entitled Tractor Services (hr/ha).
• Modify the labor section by inserting a row entitled Tractor R&M.
• In the I-O table only, move the hours from the Tractor services row currently in the capital
section to the new tradables row for these same services. These coefficients describe the number
of tractors hours used by each commodity. The Tractor Services row in the capital section and
the Tractor R&M row in the labor section should be devoid of data. New data will be written in
later.
Table 8.3. Physical Input-Output Data
High Yield Paddy Rainfed Irrigated Rainfed
Quantities
Wet
Paddy Soybeans
Corn
Tradables Fertilizer (kg/ha)
Urea
200
250
200
300
KCL
100
75
40
Chemicals (kg/ha)
10
9
4
8
Seed (kg/ha)
35
35
50
35
Tractor Services (Hr/ha)
18
Fuel (liters/ha)
64
16
Factors
Labor (hr/ha)
Seedbed Prep
200
250
140
50
Crop Care
830
950
674
260
Harvesting
275
225
150
200
Threshing
154
125
60
93
Shelling
95
Tractor R&M
Drying
24
24
60
Capital
Working Capital (Rp/ha)
413,000 254,000
135,000 121,000
Tractor Services (Rp/ha)
Thresher (hr/ha)
95
40
65
Land (ha)
1
1
1
1
Output
(kg/ha)
6,250
4,250
1,200
3,000
I-O Table
37
• Repeat the first 2 steps for the Private Prices, Private Budget, Social Prices, and Social Budget tables. Adjust units according to the nature of the table (e.g., hr/ha for the I-O table, Rp/hr
for the Prices tables, and Rp/ha for the Budget tables.) Note that Tractor Services Capital is
now on a percent basis in the Prices tables (rather than Rp/hr).
Step 4: Linking the Tractor Tables to the Input-Output and Prices Tables
The Tractor Inputs table contains information on the quantities of tradables and nontradables used per tractor service hour. The Tractor Prices table contains the private and social prices of the tradable components
(the tractor, fuel, and grease/oil) per tractor service hour. These must be converted to the unit used
throughout this analysis -- hectares -- and linked to the appropriate tables. The prices of labor and capital
have not changed and are already included in the prices tables.
•
In the labor section of the I-O table, calculate Tractor R&M labor per hectare by multiplying the number of hours of Tractor Services per hectare (in the tradables section of the I-O
table) by R&M labor per tractor service hour (on the Tractor Inputs table). Make the R&M part
of this address absolute, and copy it across the I-O table.
•
In the capital section of the I-O table, calculate Tractor Services capital per hectare by
multiplying the hours of Tractor Services per hectare (in the tradables section of the I-O table)
by Working Capital per tractor service hour (on the Tractor Inputs table). Again, refer to this
latter table using an absolute cell address to facilitate copying this formula across the columns of
the I-O table.
•
Format the new rows to be consistent with other data presented in the I-0 table.
•
In the tradables section of the Private Prices table, calculate the private price of Tractor
Services per hectare as total Cost per Tractor Service Hour, aggregated across Tractor Services, Fuel, and Grease/Oil (on the Tractor Prices table). Copy this (absolute) formula across
the columns.
•
In the labor section of the Private Prices table, copy the private price of Tractor R&M
per hectare directly down from the wages figure in the preceding row.
•
In the capital section of the Private Prices table, copy the private price of Tractor Capital per hectare directly down from the season interest rate in the preceding row.
•
Format the new rows to be consistent with other data presented in the table.
•
Calculate the social price of tradable Tractor Services, Tractor R&M labor, and Tractor Services capital in the same manner as that used for the private price, referencing data in the
Social Prices section of the Tractor Services table.
•
Update the Private and Social Budget tables by copying the formula in adjacent rows to
those for the tradable component of tractor services and the labor component of tractor services.
The capital component of tractor services should have adjusted automatically.
Save the spreadsheet as chap8.xls. Make a backup copy.
38
Sensitivity Analysis
Integrating the results of the decomposition into the existing tables is the most time-consuming part of the
exercise. However, such integration is highly desirable because it simplifies the sensitivity analysis of various types of policy proposals. Once the template has been properly implemented, it will be easy to see if
significant changes in the international price of tractors has an impact on commodity PAMs.
If the PAMs have been done correctly in the earlier exercises, changes in the Tractor Decomposition table
should be automatically reflected in the PAMs. To gain a better understanding of the relative importance
of nontradable service decomposition, perform the following sensitivity analysis. As usual, space is provided for comments.
1) Tractor prices double.
2) Fuel prices triple.
Do the PAM results change much? What do the results of this sensitivity analysis imply for data collection priorities?
Summary
This chapter has shown how to decompose nontradable services into their tradable and domestic factor
components. The illustration was simplified for ease of presentation, but the difficulty in computing costs
of nontradable services should not be underestimated. Due to the inherent problems of estimating the
social costs of services, it is often useful to assess their importance in the budget of individual commodities
before embarking on a complete analysis. This can be done by computing the value of nontradable services as a share of total costs and by performing sensitivity analyses. The diamondback method makes it
possible to incorporate a more comprehensive analysis at a later date if the nontradable services are found
to play an important role.
39
CHAPTER 9: ESTIMATING CAPITAL RECOVERY COSTS
Including the opportunity costs of fixed capital in the PAM analysis is somewhat awkward in a budgeting
framework where the focus is on annual variable costs and not on fixed costs. However, over the usual
lifetime of policies being analyzed, farmers make decisions about investment items whose costs are fixed.
Failure to include annualized fixed input costs in some form would lead to distortions, not only in decisions about durable capital goods, but also in the selection of crops and technologies.
As Monke and Pearson note in the text (pp. 139-141), one simplified, but incomplete, way to find the
annual cost of a fixed input would be to divide its initial cost by the life of the input (as was done for tractors in Table 6.2). This same method can be used to apportion the annual cost between different commodities, i.e., each crop could be debited in proportion to the time the fixed inputs were used in its cultivation.
However, this approach ignores the opportunity cost of the capital tied up in the fixed input. The farmer
could have banked the money rather than investing in a fixed production asset. The true cost of the capital,
therefore, is the annual cost plus the interest on the embodied capital. This fixed input charge is then
apportioned to the various commodities serviced by the investment item.
Estimating Capital Recovery Costs
Estimating capital recovery costs requires several steps. The first is to gather the information on the cost of
recovering the capital from an investment. This includes the initial cost of the investment (in private and
social terms), an estimate of the useful life of the machinery, its salvage value, and the total number of
"horsepower" hours it is expected to provide. The initial cost and useful life of the machine represent the
two most important parameters of the capital cost recovery calculations. After its useful life has expired,
the machine may still have a salvage value as scrap and a source of parts. The salvage value is received
several years in the future and, therefore, must be discounted using data on the private and social interest
rates found in the existing Prices tables. It is then deducted from the initial cost to derive today's net cost.
Perhaps the most complicated derivation is the recovery ratio, which involves adjusting the interest rate by
the life expectancy of the investment. As defined by Monke and Pearson, this is the share of the net cost
that must be recovered each year "to repay the cost of the fixed input at the end of its useful life." Once the
recovery ratio is determined, the actual monetary sum is calculated. This figure, the annual recovery cost,
is then prorated to an hourly basis.
Once calculated, the private and social costs of recovering investment capital are integrated into the
spreadsheet in the same manner as was used to decompose nontradables in the previous chapter. The
Input-Output table is expanded to account for the capital input. The newly-derived cost data are similarly
incorporated in the Prices tables. Budget tables are likewise expanded. The PAMs adjust accordingly.
In the current chapter, these steps will be followed to incorporate the capital recovery costs of one particular investment: the irrigation pump. In reality, the farmer may own other implements that would require
such accounting in the budgeting process (such as the tractor studied in the last chapter).
Modifications to the Spreadsheet
Creating the Capital Recovery Cost Table.
• Retrieve workbook called chap8.xls.
40
• Insert a worksheet for calculating the Capital Recovery Cost per hour of use. Use the headings shown in Table 9.1.
• Write the assumptions, shown in bold in Table 9.1, into the table: Initial Cost, Useful Life,
Salvage Value, and Total Horsepower Hours.1
• Fill in the private Interest Rate cell by writing a formula that references the interest rate in
the first column of the Private Prices table. Follow the same procedure for the Social Prices
table. These steps integrate the spreadsheet so that subsequent sensitivity analysis on the interest
rate will require the alteration of only one cell.
•Derive the Present Value of Salvage Value using the formula shown below where i = the interest rate and n = the number of time periods (in this case, years of useful life.)
Salvage
Value
---------------------------------n
(1 + i)
•The spreadsheet implementation:
Cell address of salvage value/ (1 + cell for interest rate ) ^ cell address for useful life
(^ is the character for exponentiation.)
•
Calculate Net Cost as the Initial Cost minus Present Value of Salvage Value.
•
Calculate the Recovery Ratio using the formula:2
n
(1 + i) i -------------------------n
(1 + i) – 1
•The spreadsheet implementation of this formula:
((1 + i) ^ useful life * i)/ (((1 + i)^ useful life) -1)
•Calculate the Annual Recovery Cost as the product of the Recovery Ratio and Net Cost.
•Calculate Recovery per HP-hour as the Annual Recovery Cost divided by Total HP Hours.
It will be multiplied by the hours shown in the Input-Output table.
1
Total hours is annual machine capacity in hours. Using the capacity of the machine as the denominator seems
preferable to the practice of computing percentage of use on the basis of total hours actually used. The latter depends
upon the choice of a cropping pattern and thus is a function of the entire cropping system. By using capacity, the
denominator becomes exogenous. The assumption that there is no surplus machine capacity in the sector also seems
more consistent with the long run concerns of the PAM analysis than using total actual hours.
2
Monke and Pearson derive the formula used to compute the capital recovery cost factor on p. 140 f their text.
41
Ta ble 9.1. Annua l Ca pita l Re cove r Costs
W ater Pump
Private Prices
Social Prices
Initial Cost (Rupiahs/15 hp unit)
1,120,000
800,000
Useful Life (years)
10
10
Salvage Value (Rupiahs)
112,000
80,000
Interest Rate (% per year)
28%
12%
Present Value of Salvage Value (Rp)
9,487
25,758
Net Cost (Rupiahs)
1,110,513
774,242
Recovery Ratio (% )
31%
18%
Annual Recovery Cost (Rupiahs)
339,719
137,029
Total Horsepower Hours
7200
7201
Recovery per HP-Hour (Rp/hr)
47.2
19.0
In many developing countries manufactured equipment is often wholly or partially imported. It then must
be treated like any other input. The tradable components must be valued at international prices, which are
in turn converted to domestic prices using the equilibrium exchange rate. The nontradable factors used in
its domestic manufacture or assembly must be valued at their shadow prices using the methods described
in Chapter 6.
Modifying the Input-Output, Prices, and Budget Tables.
The structure of the Input-Output, Private Prices, Private Budget, Social Prices, and Social Budget tables
are each modified in an identical fashion, by inserting a new row in the capital section. Data are then
linked from the newly created Capital Recovery table. It is easiest to complete all structural and data
changes on each table before progressing to the next. A sample drawn from the I-O table is shown in Table
8.2. Consistent with the original design of these tables, the units of measure depend on the table.
•
Go to the I-O table. Insert a row just above the Thresher Capital row as shown in the
slice of the I-O table indicated in Table 8.2. Enter data given (in bold) in Table 9.2 for the number of pump hours per hectare used by each crop.
•
Go to the Private Prices table. Add a line for the water pump under the capital section in
the same way that it was added in the Input-Output table. In the first (leftmost) pump cell, enter
the absolute address of the Recovery rate per HP-hour in the private prices column in Table
7.1. Copy the formula across the row.
•
Make the same change in the Private Budget table, i.e., insert a row above the Thresher
row. Copy the formulas that multiply the I-O table times the Prices table from the line above.
(Copying the formula into the cells of non-irrigated crops will not hurt; the result will be zero.)
•
Repeat the procedure for the Social Prices table and the Social Budget table. The cell
address in the Capital Recovery table should be the social prices Recovery ratio.
42
Table 9.2 Irrigation Pump Housepower Hours per Hectare
I-O
High Yielding Paddy Rainfed
Irrigated Rainfed
Quantities
Wet
Paddy
Soybean Corn
Capital
Working Capital (Rp/ha)
413,000
254,000 135,000 121,000
Tractor Services (hr/ha)
9000
0
0
0
Pump (hp-hr/ha)
140
0
50
0
Thresher (hr/ha)
95
40
65
0
Save the workbook as chap9.xls and chap9.bak.
Sensitivity Analysis
What effect does a change in the social interest rate from 12% to 20% have on capital recovery costs? To
5%?
43
CHAPTER 10: SENSITIVITY TO MACROECONOMIC ASSUMPTIONS
Macroeconomic disequilibria can swamp attempts by policymakers to stimulate agricultural production
using commodity policies. Policymakers, therefore, need to test the responsiveness of the agricultural sector to changes in macroeconomic variables, such as interest rates, exchange rates, and wage rates. There
are often numerous macroeconomic policies in effect, both complementing and eroding each other's influence. Attempts to lift these various layers range from the simple to the elaborate, depending on the nature
of the policy changes envisioned.
Divergences in the PAMs are the differences between social and private valuations. The social prices were
derived from international prices, adjusted by exchange rates, processing losses, and domestic distribution
costs. With the exception of efforts to estimate the tradable components of tractor services, very little
attempt has been made to detail the components of private prices. The prices observed in the market are
the result of the forces of domestic supply and demand, including the effect of international trade. It is thus
possible to derive private "parity prices", analogous to the social parity prices calculated in Chapters 6 and
7. These private "parity prices" are likewise based on international prices, official exchange rates, processing losses, and distribution costs. In addition, they incorporate commodity policies, such as the taxes and
subsidies imposed by the government. In the absence of quantity restrictions, private parity prices should
approximate prices observed in the market place.
This chapter explains how to construct private import and export parity prices and integrate them into the
spreadsheet. Next, the macroeconomic and commodity policy assumptions are written into a table and
linked to the spreadsheet. In the final section, the fully integrated spreadsheet is used to evaluate the
impact of overvalued exchange rates on the PAMs.
Modifying the Spreadsheet
Creating the Private Import Parity Table.
• Retrieve chap9.xls and resave it as chap10.xls.
• Insert a new worksheet and rename it Sensitivity. In one step, copy the Social Import Parity
Tables 7.1 and 7.2 and the Social Export Parity Prices Table 7.3 under the Additional tab into
the worksheet, substituting the word Private for the word Social in the title. Adjust the column
widths as necessary.
• Change the Exchange Rate Premium (%) label to Devaluation (%). Change the Equilibrium Exchange Rate (Rp/$) label to Post Devaluation Rate (Rp/$), as indicated in Table 8.1.
• Set the Devaluation (%) figures to zero as opposed to the .10 used in the original Social
Import Parity table.
44
• Insert four lines under C.i.f. in domestic currency and weight units (Rp/kg) and label them:
Net Trade Tax (%)
Domestic Subsidy (%)
Domestic Tax (%)
Domestic Price (Rp/kg)
• Enter the net trade tax, domestic subsidy, and domestic tax rates shown in bold in Table
8.1. These rates differ by commodity. These rows provide for analyses of commodity policies
such as trade protection or domestic taxation.
• Calculate the Domestic Price (Rp/kg) for import-competing outputs (such as paddy and soybeans) as:
C.i.f. (in Domestic Currency and Weight Units) * (1+Net Trade Tax rate
+Domestic Subsidy rate - Domestic Tax rate)
• Calculate the Domestic Price (Rp/kg) for imported inputs (such as KCL, chemicals, seeds
and fuel) as:
C.i.f .* (1 + Net Trade Tax rate - Domestic Subsidy rate + Domestic Tax rate )
Table 10.1 Private Import Parity Prices for Outputs
Output
Paddy (wet) Paddy (dry) Soybeans
F.o.b. ($/ton)
287
292
246
Freight & Insurance ($/ton)
17.5
17.5
15.5
C.i.f. Indonesia ($/ton)
304.5
309.5
261.5
Exchange rate (Rp/$)
1,644
1,644
1,644
Devaluation (%)
0%
0%
0%
Post Devaluation Rate (Rp/$)
1644
1644
1644
C.i.f. in domestic currency (Rp/ton)
500,598
508,818
429,906
Weight conversion factor (kg/ton)
1000
1000
1000
C.i.f. in dom. curr. (Rp/kg)
500.6
508.8
429.9
Net trade tax (5)
5%
5%
80%
Domestic subsidy (5)
0
0
0
Domestic tax (5)
0
0
0
Domestic price (Rp/kg)
526
534
774
Transportation costs (Rp/kg)
5
5
5
Marketing costs (Rp/kg)
7
7
7
Value before processing (Rp/kg)
537.6
546.3
785.8
Processing conversion factor (%)
0.64
0.64
1
Private import parity price at wholesale (Rp/kg)
344.1
349.6
785.8
Distribution costs to farm (Rp/kg)
5
5
5
Import parity value at farm gate (Rp/kg)
339.1
344.6
780.8
45
In developing the cell formulas, Net Trade Taxes are positive, Domestic Subsidies are positive, and Domestic Taxes are negative for import-competing outputs. In the case of imported inputs, the Domestic subsidy
and Domestic tax signs are reversed. For example, domestic taxes must be added to the c.i.f. price because
they increase the price of the imported input. To account for the possibility that several programs may
affect the same commodity, write the formula so that the effective policy rate is the difference between the
subsidy rate and the tax rate.
• Reformulate the Value before Processing as the sum of the Domestic Price, Transport, and
Marketing costs.
• The rest of the figures will be calculated automatically.
Table 10.2. Private Import Parity Prices for Inputs
Urea
F.o.b. ($/ton)
Freight & Insurance ($/ton)
Chemical
152
Paddy Seed
3750
Soyseed
187
453
Cornseed
Fuel
116
182
6.89
163
17.5
15.5
14.86
10.4
C.i.f. Indonesia ($/ton)
158.89
3913
204.5
468.5
130.86
192.4
Exchange rate (Rp/$)
1,644
1,644
1,644
1,644
1,644
1,644
Exchange rate premium (%)
0%
0%
0%
0%
0%
0%
Equilibrium exchange rate (Rp/$)
1,644
1,644
1,644
1,644
1,644
1,644
C.i.f. in domestic currency (Rp/ton)
261,215
6,432,972
336,198
770,214
215,134
316,306
Weight conversion factor (kg/ton)
1000
1000
1000
1000
1000
1000
C.i.f. in dom. curr. (Rp/kg)
261.2
6433.0
336.2
770.2
215.1
316.3
15%
15%
15%
15%
15%
15%
Domestic subsidies (5)
0
0.0
0.0
0.0
0.0
0.0
Domestic taxes (%)
0
0.0
0.0
0.0
0.0
0.0
Net trade taxes (%)
Domestic price (5)
300.4
7,397.9
386.6
885.7
247.4
363.8
Transportation costs (Rp/kg)
5
5
5
5
5
5
Marketing costs (Rp/kg)
7
7
7
7
7
7
Value before processing (Rp/kg)
312.4
7409.9
398.6
897.7
259.4
375.8
Processing conversion factor (%)
1
1
1
1
1
1
312.4
7409.9
398.6
897.7
259.4
375.8
5
5
5
5
5
5
317.4
7414.9
403.6
902.7
264.4
380.8
Private Import parity price at wholesale (Rp/kg)
Distribution costs to farm (Rp/kg)
Import parity value at farm gate (Rp/kg)
Step 2: Creating the Private Export Parity Prices Table.
Follow the procedures in Step 1 to construct the Private Export Parity Prices table. Note, however, the
following key differences:
• The Domestic Price is calculated by adding subsidies and deducting taxes, i.e., domestic and
foreign trade taxes. The cell formula is:
F.o. b.* (1 + (Domestic Subsidy rate - Domestic Tax rate - Net Trade Tax rate ))
46
Table 10.3. Private Export Parity Prices for Inputs
Corn
Corn Seed
F.o.b. ($/ton)
115
3750
Freight & Insurance ($/ton)
17.5
163
C.i.f. Indonesia ($/ton)
97.5
3913
Exchange rate (Rp/$)
1,644
1,644
Exchange rate premium (%)
0%
0%
Equilibrium exchange rate (Rp/$)
1,644
1,644
C.i.f. in domestic currency (Rp/ton)
160,290 6,432,972
Weight conversion factor (kg/ton)
1000
1000
C.i.f. in dom. curr. (Rp/kg)
160.3
6433.0
Net trade taxes (%)
5%
15%
Domestic subsidies (5)
20%
20%
Domestic taxes (%)
0
0.0
Domestic price (5)
168.3
7,397.9
Transportation costs (Rp/kg)
5
5
Marketing costs (Rp/kg)
7
7
Value before processing (Rp/kg)
180.3
7409.9
Processing conversion factor (%)
1
1
Private Import parity price at wholesale (Rp/kg)
180.3
7409.9
Distribution costs to farm (Rp/kg)
5
5
Import parity value at farm gate (Rp/kg)
185.3
7414.9
KCL
187
17.5
204.5
1,644
0%
1,644
336,198
1000
336.2
15%
20%
0.0
386.6
5
7
398.6
1
398.6
5
403.6
• Similar to the original Social Export Parity Prices table, transportation and marketing costs
are deducted rather than added.
Step 3: Linking the Private Import and Export Parity Tables to the Private Prices
Table.
In the preceding two steps, the private prices of most inputs and outputs were decomposed into their
various components. To facilitate sensitivity analysis, these prices must be linked to the Private Prices
table that underlies the PAM.
• Begin with the inputs. In the first cell of the row for urea in the Private Prices table, reference the private import parity price for urea (from the Private Import Parity Price table). Make
the cell address absolute. Next, copy the formula into the remaining commodity columns.
Repeat this procedure for chemicals and fuel. For paddy and soybean seeds, take care to reference the appropriate seed price. Do not link the price of corn seed.
• Move to the last row of the first column, of the Private Prices table, that for the output of wet
season paddy. Write an absolute reference to the private import parity price for wet paddy.
Copy it to the remaining wet paddy columns. Use the same procedure for dry paddy and soybeans.
• Repeat the entire procedure for corn and KCL, drawing from the results in the Private Export
Parity Prices table. Do not link the price of corn seed.
47
Step 4: Creating the Assumptions Table
The links established in the preceding step make it possible to trace the effects of macro-economic policy changes on private prices, profitability, and economic efficiency. Because of their "macro" nature,
changes in exchange rates and interest rates influence prices throughout the economy. The simplest and
most prudent way to analyze such changes is to group all such assumptions in one table and reference that
table throughout the spreadsheet. The few macroeconomic parameters illustrated in this chapter include:
1) The nominal interest rate. The nominal interest rate is the return to capital in private markets.
Markets for capital are often highly distorted in developing countries. Sensitivity analysis of the private
interest rate helps determine whether special agricultural credit programs have a significant impact on the
sector's competitiveness.
2) The social interest rate. The social interest rate reflects the long-run opportunity cost of capital.
The World Bank and other international agencies periodically publish estimates of social interest rates.
3) The official exchange rate. The government sets this rate and uses it for government transactions.
This policy parameter enters in the translation of international output and input prices into domestic currency.
4) The exchange rate premium measures the extent to which the official exchange rate is over- or
undervalued. (See Monke and Pearson, pp. 197-198)
5) The devaluation percent. Changing this figure simulates a devaluation policy.
For the sake of comparison, commodity-specific policies, such as border taxes, domestic taxes and
subsidies, are also incorporated.
Create a table for Assumptions, similar to the one portrayed in Table 10.4.
Step 5: Linking the Assumptions Table to Other Tables in the Worksheet.
• Link the Nominal interest rate to the Private Prices table. Make the reference absolute and
copy it across all columns in the Working Capital and Tractor Services columns. Because the
Capital Recovery table was linked to the Private Prices table in Chapter 9, the capital recovery
ratio, pump expenses and private budget will be updated automatically.
48
Table 10.4 Assumptions Table
Macroeconomic assumptions
Nominal interest rate (%)
Social interest rate (%)
Official exchange rate (Rp/$)
Exchange rate premium (%)
Percent devaluation (%)
Commodity policies
Rice tariff (%)
Soybean tariff (%)
Corn export tax (%)
28%
12%
1644
10%
0%
5%
80%
5%
• Link the Social interest rate (i.e., the social return to capital) to the Social Prices table. As in
the private budget case, the link from the prices table to the capital recovery ratio and social budget will be automatic.
• Link the Exchange rate premium to the Social Export and Import Parity price calculations.
Do not link the official exchange rate to these tables, because social prices are not affected by
devaluations. The exchange rate premium can be changed to test the responsiveness of PAMs to
alternative assumptions about the equilibrium exchange rate.
• Link the Official exchange rate and the Percent Devaluation to the new Private Import and
Export Parity Price tables. This connection will make it possible to simulate changes in
exchange rate policy.
• Link the commodity policy entries (tariffs and taxes) of the Assumptions table to the appropriate cells in the Private Import and Export Parity Price tables.
Save the workbook as chap10.xls. Save again to create chap10.bak.
Sensitivity Analysis
Now that the spreadsheet is fully integrated, a number of sensitivity analyses on macroeconomic indicators
can be performed. This section illustrates the effect of a devaluation on the profitability of corn. Create
windows with the Assumptions table on one side of the screen and the corn PAM on the other. Assume the
government has decided to devalue the exchange rate by 10 percent to eliminate the degree of overvaluation assumed to exist. Change the official exchange rate from 1644 to 1808 in the Assumptions table.
Answer the following questions:
1) What is the total effect of the devaluation on the results of the PAM?
2) Is the percentage change in the level of divergences between private and social prices exactly
equal to the 10 percent devaluation? Why or why not?
3) How can the farming system register an apparent "subsidy" when the output appears to remain
"taxed?"
4) Why does devaluation only affect the price of tradables and not the price of factors (at least initially)? Can factor prices be expected to increase with adjustment to the new relative prices of tradables
versus nontradables?
49
5) What implications for policy analysis can be drawn from the devaluation experiment?
Repeat the devaluation experiment for other commodities. Try to answer Questions 1 to 5 using
other commodity PAMs.
Final Comments Regarding the Workbook Method
At this point, there are nearly a dozen tabs along the bottom of the spreadsheet. To make as many visible as
possible, drag the divider of the left hand of the horizontal scoll bar to the right. Most tables can be seen
without scrolling. The early tables are arranged according to a series of tasks. For example, the Input-Output table, the Private Prices table, and the Private Budget are under the tab P-Budgets. Social Prices and the
Social Budget are under another tab, followed by the various single and farming system PAMs. The placement of subsequent tables occurred as the PAM analysis incorporated more complex treatments of nontradable inputs and fixed inputs.
Once familiar with the PAM approach and the workbook feature, users may wish to rearrange the
sequence of the tables. For example, experienced users may wish to complete the parity price tables and
the capital recovery cost table before the private and social prices tables, since the former tables feed into
the latter. These are matters of individual taste. So long as important topics are grouped into worksheets
under a workbook format, the order of the tables is irrelevant. The spreadsheet software, using a "natural"
order of recalculation, will decide which cells should be computed prior to other cells. The order in which
the cells are evaluated will have little discernible effect on the speed with which the final results are computed.
50