SOCIAL ACCOUNTING MATRICES AND MULTIPLIER ANALYSIS

An Introduction with Exercises Clemens Breisinger Marcelle Thomas James Thurlow

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Overview
Exercise 1: Composition of a SAM Exercise 2: Analysis of a SAM Exercise 3: Input-output linkages and multiplier effects Exercise 4: Unconstrained SAM multiplier analysis Exercise 5: Constrained SAM multiplier analysis

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Exercise 1

Composition of a SAM

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Circular flow diagram of the economy

Factor earnings (value-added) Domestic private savings

Factor markets
Indirect taxes

Direct taxes

Fiscal surplus

Productive activities

Households
Intermediate demand Social transfers

Government

Investment

Sales income

Commodity markets
Exports (E)

Consumption spending (C)

Recurrent spending (G)

Investment demand (I)

Imports (M)

Rest of world
Remittances Foreign grants and loans Capital inflows

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Basic structure of a SAM

Expenditure columns
Activities C1 Activities R1 Commodities R2 Intermediate demand Value-added Factor payments to households Sales taxes and import tariffs Direct taxes Private savings Import payments (M) Gross output Total supply Total factor spending Total household spending Government expenditure Total investment spending Foreign exchange inflow Fiscal surplus Social transfers Foreign remittances Foreign grants and loans Current account balance Commods C2 Domestic supply Consumptio Recurrent n spending spending (G) (C) Investment demand (I) Export earnings (E) Factors C3 Households Government C4 C5 Investment C6 Rest of world C7 Total Activity income Total demand Total factor income Total household income Government income Total savings Foreign exchange outflow

Income rows

Factors R3 Households R4 Government R5 Savings R6 Rest of world R7 Total

Exercise 2

Analysis of a SAM

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

2007 Ghana macro-SAM (millions of cedi)

Activities C1 Activities R1 Commodities R2 Labor R3-1 Capital R3-2 Commods C2 24,996 Factors Labor Capital C3-1 C3-2 Households C4 Govern. C5 Investment C6 Rest of world C7 Total

24,996

12,029

12,142

1,805

4,680

5,151

35,807

Factors

9,717

9,717

3,250

3,250

Households R4 Government R5 Savings R6 Rest of world R7 Total 24,996 8,439 2,372

9,717

3,250

1,387

2,001

16,354

940

739

4,052

3,272

860

548

4,680

8,439

35,807

9,717

3,250

16,354

4,052

4,680

8,439

Exercise 3

Economic linkages and multiplier effects

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Direct and indirect linkages

Total impact of an exogenous demand shock = Direct effects + Indirect effects Indirect effects = Production linkage effects + Consumption linkage effects Consumption linkages: increased incomes generating consumption demand for other sectors products Production linkages = Backward linkages + forward linkages Backward linkages: additional demand generated by producers when they purchase intermediate inputs from other sectors Forward linkages: supply of upstream producers with intermediate inputs
Direct effects Exogenous shock Indirect effects Production linkages Consumption linkages Backward linkages

Forward linkages

Circular income flow in the multiplier process

Increase in agricultural exports
Direct effect A Increase in agricultural production Production linkages Indirect effects

A: Output multipliers B: GDP (value-added) multiplier C: Income multiplier

B Increase in factor incomes and employment Tax leakage Government

Increase in nonagricultural production

Consumption linkages

Increase in household incomes and consumption

Import leakage Rest of world

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Exercise 4 Unconstrained SAM multiplier analysis

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Key assumptions for multipliers

Three assumptions behind multipliers

1. Prices are fixed and any changes in demand lead to changes in physical output rather than prices.
2. Factor resources are unlimited or unconstrained, so that any increase in demand is matched by increased supply. 3. Input coefficients of producers and consumption patterns of households are unaffected by exogenous changes in demand (i.e., linkage effects are linear and there is no behavioral change).
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

SAM entries expressed as letters or symbols

We can replace the values appearing in the SAM with letters so that we can use them in deriving the multiplier formula
Activities A1 A2 Commodities C1 C2 X1 X2 Factors F Households H Exogenous demand E Total X1 X2 Z1 Z2 V Y E

A1 A2 C1 C2 F H E Total

Z11 Z21 V1 X1

Z12 Z22 V2 V1 + V2 X2 L1 Z1 L2 Z2 V

C1 C2 S Y

E1 E2

X Z V Y E

= gross output of each activity (i.e., X1 and X2) = total demand for each commodity (i.e., Z1 and Z2) = total factor income (equal to household income) = total household income (equal to total factor income) = exogenous components of demand (i.e., government, investment and exports)

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Coefficient matrix (M-matrix)

We then divide each column through by its column total in order to derive a coefficients matrix (called M-matrix)
Activities A1 A2 Commodities C1 C2 b1= X1/Z1 b2= X2/Z2 Factors F Households H Exogenous demand E Total X1 X2 Z1 Z2 V Y E

A1 A2 C1 C2 F H E Total

a11=Z11/X1 a21=Z21/X1 v1=V1/X1 1

a12=Z12/X2 a22=Z22/X2 v2=V2/X2 1 1 l1 = L1/Z1 1 l2 = L2/Z2 1 1

c1 = C1/Y c2 = C2/Y s = S/Y 1

E1 E2

a b v l c s

= technical coefficients (i.e., input or intermediate shares in production) = share of domestic output in total demand = the share of value-added or factor income in gross output = share of the value of total demand from imports or commodity taxes = household consumption expenditure shares = household savings rate (i.e., savings as a share of total household income)

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Unconstrained multiplier formula (1)

Total demand Z in each sector is the sum of intermediate input demand, household consumption demand, and other exogenous sources of demand E

Z1 =a11 X1 +a12 X 2 +c1 Y+E1 Z2 =a 21 X1 +a 22 X 2 +c2 Y+E 2

From the SAM we know that gross output X is only part of total demand Z

X1 =b1 Z1

X 2 =b 2 Z 2

We also know household income depends on the factors earnings shares in each sector

Y=v1X1 + v 2 X 2 = v1b1Z1+ v 2 b 2 Z2
We can now replace X and Y in the demand equations

Z1 =a11b1 Z1+a12b2 Z2 +c1 ( v1b1Z1+ v2b2 Z2 ) +E1 Z2 =a21b1 Z1 +a 22 b2 Z2 +c2 ( v1b1Z1+ v2b2 Z2 ) +E2
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Unconstrained multiplier formula (2)

From the previous slide

Z1 =a11b1 Z1+a12b2 Z2 +c1 ( v1b1Z1+ v2b2 Z2 ) +E1 Z2 =a21b1 Z1 +a 22 b2 Z2 +c2 ( v1b1Z1+ v2b2 Z2 ) +E2
Move all terms, except for exogenous demand E, onto the left-hand side

Z1 -a11b1 Z1-c1 v1b1Z1-a12 b 2 Z2 -c1v 2 b 2 Z2 =E1 -a 21b1 Z1 -c2 v 1b1Z1+ Z2 -a 22 b 2 Z2 -c2 v 2 b 2 Z2 = E 2

Finally, we group Z terms together

(1-a11b1 -c1 v1b1) Z1 + ( -a12b2 -c1v2b2 ) Z2 =E1 ( -a21b1 -c2 v 1b1) Z1 + (1-a 22b2 -c2 v2b2 ) Z2 = E2
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Unconstrained multiplier formula (3)

From the previous slide

(1-a11b1 -c1 v1b1) Z1 + ( -a12b2 -c1v2b2 ) Z2 =E1 ( -a21b1 -c2 v 1b1) Z1 + (1-a 22b2 -c2 v2b2 ) Z2 = E2
We can now use matrix algebra to convert the equations into matrix format

The first term is the identity matrix (I) minus the coefficient matrix (M). We can also rename the other two vectors Z and E

( I-M ) Z = E
Finally, by rearranging terms, we arrive at the unconstrained multiplier formula.
-1 Z = ( I-M) E

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Exercise 5

Constrained SAM multiplier analysis

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Dropping a key assumption

Unconstrained multipliers assume that factor resources are unlimited or unconstrained, so that any increase in demand is matched by increased supply. We now drop this assumption by preventing or constraining changes in some sectors production levels. For the sectors with constrained supply, it is net exports that now decline when demand increases (i.e., imports increase to replace any shortfall in domestic production).

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Constrained multiplier formula (1)

We derived the following demand equations in Exercise 4

(1-a11b1 -c1 v1b1) Z1 + ( -a12b2 -c1v2b2 ) Z2 =E1 ( -a21b1 -c2 v 1b1) Z1 + (1-a 22b2 -c2 v2b2 ) Z2 = E2
We now distinguish between sectors that can change their production level (Z1), and those sectors with supply constraints (Z2).
Previously exogenous components of demand are now treated as exogenous (E2) (i.e., net exports will now be able to change if domestic production cannot).

As with the unconstrained multiplier formula, we group exogenous components onto the right-hand side

(1-a11b1 -c1 v1b1) Z1 =E1 + ( a12b2 + c1v2b2 ) Z2 ( -a21b1 -c2 v 1b1) Z1 - E2 = - (1-a 22b2 -c2 v2b2 ) Z2
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Constrained multiplier formula (2)

From the previous slide

(1-a11b1 -c1 v1b1) Z1 =E1 + ( a12b2 + c1v2b2 ) Z2 ( -a21b1 -c2 v 1b1) Z1 - E2 = - (1-a 22b2 -c2 v2b2 ) Z2
This equation can be expressed in matrix format

The first term on the left-hand side is the identity matrix (I) minus an adjusted coefficient matrix (M*). We will call the first term on the right-hand side the B-matrix.

Finally, by rearranging terms, we arrive at the constrained multiplier formula.

This presentation accompanies the book:

SOCIAL ACCOUNTING MATRICES AND MULTIPLIER ANALYSIS An Introduction with Exercises

Clemens Breisinger, Marcelle Thomas, and James Thurlow
Copyright 2009 International Food Policy Research Institute. All rights reserved. For permission to republish, contact ifpri-copyright@cgiar.org.

www.ifpri.org
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE