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Social Accounting Matrix:

General equilibrium analysis

Isah Musa Ahmad

Advanced Macroeconomics Analysis

Outline

• General equilibrium analysis• What is SAM?• Construction of SAM• Advantage & Disadvantage SAM

• Strengths and limitations of SAM in brief

Neoclassical Macroeconomics?

 approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. Present day dominant school of economic thought built on the foundation laid by the 18th century (classical) theories of  Adam Smith (1723-1790) David Ricardo (1772-1823) which were refined by;

19th and 20th century theories of Alfred Marshall (1842-1924), Vilfredo Pareto (1848-1923), John Clark (1847-1938), and Irving Fisher (1867-1947).

Economic Equilibrium: Overview

• State of balance or equal magnitude.

• In economics, economic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change.

• Equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.

•  Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.

Types of equilibrium • Partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the market, ceteris paribus, to attain equilibrium.

• As defined by George Stigler, "A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed during the analysis.

Cont`

Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any.

Is a single sectoral analysis on a short run scenario.

Hence this analysis is considered to be useful in constricted markets.

Assumptions• Commodity price is given and constant for the

consumers.

• Consumers' taste and preferences, habits, incomes are also considered to be constant.

• Prices of prolific resources of a commodity and that of other related goods are known as well as constant.

• Industry is easily availed with factors of production at a known and constant price compliant with the methods of production in use.

• Prices of the products that the factor of production helps in producing and the price and quantity of other factors are known and constant.

• There is perfect mobility of factors of production between occupation and places.

Limitations• It is restricted to one particular field. Be it a case

of an individual, a firm, or an industry. It does not take into account the study of economics.

• It lacks the ability to study the interrelations of all the parts of the economy.

• This analysis will fail if the improbable assumptions, which disconnect the study of specific market from the rest of the economy, are not taken into consideration.

• It has been unsuccessful in explaining the outcome of economic disturbance in the market that leads to demand and supply changes, moving from one market to change in the whole economy.

Strengths

• Specifies the behavior of all the economic agents using widely-accepted principles of optimization and choice.

• Possibility of deriving better measures of the welfare gain or loss associated with a new policy.

• Flexibility

• Attractiveness

• Simple to compute and interpret

Weakness

• Lack of empirical validation of the model.

• Focus and target long term questions.• Inadequate treatment of the foreign sector.

• Narrow and highly restrictive.

General equilibrium

• In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall (or "general") equilibrium.

• Based on the Walrasian tradition, general equilibrium models describe the allocation of resources in a market economy as the result of the interaction of supply and demand, leading to equilibrium prices.

Broadly speaking, general equilibrium tries to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents. Macroeconomics, as developed by the Keynesian economists, focused on a "top-down" approach, where the analysis starts with larger aggregates, the "big picture". Therefore, general equilibrium theory has traditionally been classified as part of microeconomics.

General equilibrium macroeconomic models usually have a simplified structure that only incorporates a few markets, like a "goods market" and a "financial market". In contrast, general equilibrium models in the microeconomic tradition typically involve a multitude of different goods markets. They are usually complex and require computers to help with numerical solutions.

• The first attempt in neoclassical economics to model prices for a whole economy was made by Léon Walras.

• Was the first to lay down a research program much followed by 20th-century economists. In particular, the Walrasian agenda included the investigation of when equilibria are unique and stable.

• Walras also proposed a dynamic process by which general equilibrium might be reached, the process is a model for investigating stability of equilibria. Prices are announced (perhaps by an "auctioneer"), and agents state how much of each good they would like to offer (supply) or purchase (demand). 

• Some think Walras was unsuccessful and that the later models in this series are inconsistent

Operational constraints

• Substantial investment in data gathering, analysis and adjustment.

• Subjectivity due to simplification, manipulation & adaptation.

• Difficulty to develop a model for the whole country.

• Simulation model not forecasting or econometric model.

Difference between Partial and General Equilibrium Partial Equilibrium General Equilibrium

• Developed by Alfred M arshall • Léon W alras was first to develop it.

• Related to single variable • M ore than one variable or economy as a whole is taken into consideration

• Based on two assumptions:

1. Ceteris Paribus 2. Other sectors are not affected due to

change in one sector.

• It is based on the assumption that various sectors are mutually interdependent. There is an effect on other sectors due to change in one.

• Other things remaining constant, price of a good is determined

•Prices of goods are determined simultaneously and mutually. Hence all product and factor markets are simultaneously in equilibrium.

What is a SAM?• A square matrix accounting framework that represents an

economy’s flows of income

• A SAM is a money-matrix. Every entry represents a monetary value

• More specifically: it captures transactions and transfers among all economic agents in an economy (production sectors, households, government, foreign actors)

• A square matrix has equal number of rows and columns

• Each row and column in a SAM is called an account

• Each cell in a SAM represents a payment from the column account to the corresponding row account.

A cell in a SAM

• Each cell in a SAM, thus, represents expenditure and receipt.

• A SAM is thus follows a double-accounting entry system• The sum of rows must be equal to the sum of columns for each account!!!

SAM Is regarded as an extension of input output table in the form of a matrix representing all transactions and transfers between different production activities, factors of production and institutions within the economy and with respect to the rest of the world.A comprehensive accounting framework within which full circular flow of income from production to factors incomes, household income to household consumption and back to production is captured.Transactions in economy is presented in matrix. Row gives receipt of an account and column gives expenditure.Total of each row is supposed to be equal to total of each corresponding column.

Come about of SAM developed at the “Cambridge Growth Project” in Cambridge, UK,

in 1962 by Stone and Brown.

Used for National Account for World Bank.

Graham Pyatt & Erik Thorbecke, the leading proponents and developers of SAMs.

By the early 1980s, models were heavily used by World Bank for development analysis. SAMs were similarly a mainstay of Bank analysis.

Presently, adopted by many private & public institutions across the world.

Basic structure of SAM

Basic Structure of SAM … Cont’d

Basic structure of SAM …Cont’d

• Activities produce commodities • Commodities are goods and services produced by activities

Why do we separate Activities and Commodities?

• Two reasons:• An activity may produce more than one commodity

• A commodity may be produced by more than one Activity. E.g. coffee could be produced by large-scale farmers or by small-scale farmers.

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Accnt. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Additional variablesSh = Private Savings

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Accnt. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Additional variablesSg = Government Savings

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Accnt. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Additional variablesT = Tax Payments

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Accnt. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Additional variablesSf = Foreign Savings

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Additional variablesG = Government Spending

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Accounting Identities:

Mat. Bal. Y + Z = C + G + I + X

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Accounting Identities:

Income C + T + Sh = Y

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Accounting Identities:

Govt. Budget G + Sg = T

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Accounting Identities:

Saving-Investment I = Sh + Sg + Sf

Social Accounting Matrices (SAMs)

Expenditures

Receipts 1 2 3 4 5 Total

1. Suppliers

- C G I X Demand

2. Households

Y - - - - Income

3. Government

- T - - - Receipts

4. Capital Acc. - Sh Sg - Sf Savings

5. Rest of World Z - - - - Imports

Total Supply

Expendi-ture

Expenditure

Invest-

mentROW

Accounting Identities:

Trade Balance X + Sf = Z

  ActivitiesR1

Commodities

Transaction cost

Factors C4

Household C5

Firms C6 Govt. C7 Taxes C8

Savings C9

Rest of the world C10

Total

ActivitiesR1

  Domestic supply

                Gross output

Commodities

Intermediate demand

  Transaction costs

  Household consumptions

  Govt. consumptions

  Investment demand

exports Total demand

Transaction cost

                    Transaction cost

Factors R4

Factor income

                  Factors income

Household R5

      Wages, rent

  Profit income

Transfer to households

    Foreign remittances

Household income

Firms R6       profits

            Firm income

Govt. R7       Govt. of profits

      Direct & indirect taxes

  Net govt. income from abroad

Govt. Income

Taxes R8 Prod. taxes

Consumption & import taxes

    Personal income tax

Company income tax

        Taxes

Savings R9

        Household savings

  Govt. Savings

    Current account balance

Total Savings

Rest of the world C10

  imports   Payment to foreign capital

            Foreign exchange outflow

Total Gross output

Total supply

Transaction costs

Factor income

Household expenditure

Firms expenditure

Govt. expenditure

Taxes Total investment

Foreign exchange inflow

 

Advantages of SAM• ability to capture a wide variety of developments

in a (macro-) economy, as it links production, factor and income accounts

• disaggregates large share of economic activities to smaller groups to show the effect of each group.

• it is a relatively efficient way of presenting data.

• useful tool to reconcile different data sources and fill in the gaps. This enables the reliability of existing data to be improved and inconsistencies in data sets of different nature be adjusted.

Limitations of SAM• restrictive, assumptions made, that all firms in a

given industry employ a constant production average of input, output, labour, technology and produce identical products.

• model assumes that there are no economies or diseconomies of scale in production or factor substitution.

• The statistical estimation of a new matrix is very labour-intensive and expensive. This is mainly because much of the information is gathered with help of micro-survey questionnaires.

• A related problem with this method is that interviewees, firms, or households, are not able to give perfect answers.

•Thank You for Listening!