Partial Equilibrium Analysis and Distributional Effects of Trade ReformsPartial Equilibrium (overview)Distributional impacts (framework)Applied Exercise

What is Partial Equilibrium?Partial equilibrium is based on only a restricted range of data. The effects of policy actions are examined only in the markets that are directly affected (apples not oranges)Supply and demand curves are used to depict the price effects of policies. Producer and consumer surplus is used to measure the welfare effects on participants in the market. Ignores spillover effects on other industries /countriesGeneral Assumptions:Country is relatively smallSector in question is smallNo adjustment - short term Consumer preferences are fixedPerfect mobility of factors of production

No long term effects such as growth or reallocation of production factors are taken into account.

Benefits of using Partial Equilibrium AnalysisEasier to implement than general equilibriumLess of a black box than general equilibriumLess data requirementsAllows for larger details / customizationDisaggregated tariff line level analysisAllows to model market distortionsAllows for the use of more specific parameters More customizable approachEasy to Change parameters and check for robustness to different assumptions (confidence intervals)

PE for analyzing trade policiesFeed the model with change in trade policy and what we get out of it?

Analysis of own trade policyPrice (consumers and producers)Quantity imported (diversion and creation)Tariff RevenuesAnalysis of Market Access Quantity exportedProducers Price

Simple effect of a tariff in PETwo countries USA exports MEX importsQft = Q in free tradeQt = Q with tariff T

For MexicoPE results of Tariff:new higher price new lower quantitytariff revenue

For USA PE results of Tariff:new lower price new lower quantityNew price and new quantities are the sources of welfare effects

Small importing country

This assumption will make the analysis even simpler

NO Term of trade effectsEffects on Exporting countries

The effects of the tariff are only for the importing countryExample: Lower tariff on rice from Vietnam (in US) will not affect US prices or Wld prices.

Tariffs and domestic goodsPE often assumes heterogeneous varieties (import is different from domestic production).

But most likely there is some substitution. (i.e.the domestic price and quantities of both imported and domestically produced goods will be affected).

Some pre-made PE models take this into account with:Homogeneous goods (substitution)Large importing country Tariff lowers world prices because demand declines, relatively higher dometic prices (terms of trade effect)

Trade policy: 2nd order effectsSometimes in modelsDomestic demand effectsGovernment expenses

Often notProduction changesEmploymentWages Substitutions to different goods

Not generally provided by PE models, but they could be estimated.

Policy questions When to use PE models?Impact on trade flows of: Free Trade Agreements, Customs Unions, unilateral tariff cuts, etcImpact on domestic prices, government revenues. Impact of change in trade policy in specific markets and products.Not good for Multilateral liberalizations, WTO. Doha.

With some additional work:Analysis about effects and adjustment costs on:domestic output, employment losses, inequality, poverty, income distribution, etc.

Some PE assumptions:NO substitution between different products (modeling one market at a time)Armington assumption: Imperfect substitution between imports of product i from trading partners A, B, C, (varieties)Modeling based on elasticities (percentage changes): Zero trade flows remain zero (no market entry of new trading partners)

How PE works:example: effect of change in tariffStep-by-Step approach vs simultaneous

Input: Change in trade policy (tariff)ParametersOutput:Effect on prices and quantities (volumes) tradedTrade diversion effectTrade creation effect

Most PE software gives you only change in import and exports, but these come from change in prices and quantities.

Step 1: Price effectDomestic price is simply given by the world price + the tariff + other taxesWhen tariff is zero the domestic price = world price + taxes World Price does not change (small country, or small import, assumption)World price is set to 1, and tariff represents the percentage change.

Numerical Example: Country C liberalizes with B but not with AExample: Bilateral liberalization: Initial tariff of 25% with country B and A. Tariff for B is brought to 0. Other taxes remain unchanged.

Step 2 - Trade DiversionExport substitution: Imports from country A are replaced with imports from country B as the relative price for imports from country B falls due to tariff reduction (varieties)

Export substitution is imperfect and depends on the Substitution elasticity: The change in imports from country B relative to imports from country A.

Trade diversion: total imports remain the same, but imports from country B increase at the expense of imports from country A.

Trade diversion does not occur in MFN liberalization and all countries facing the same tariffs.

Numerical ExamplePre defined parameter: Substitution Elasticity = 2*Imports + (imports*subst*price) = total import effect from BHowever this has to be scaled down to keep total imports constant.

Step 3 - Trade CreationDomestic substitution: Domestic production is replaced with imports if the average domestic price of imports decreasesMFN change: Average domestic price of imports: Import price changes by trading partner weighted by their import share (why?)Depends on Import Demand elasticity: Percentage change in consumption of imported goods relative to domestically produced goods following a 1 percent change in the average price of imports Total domestic consumption (demand) remains the same but imports increase at the expense of domestically produced goods

Numerical ExamplePre defined parameter: Import demand elasticity = 1*Import+import*elast*price = total import due to lower priceHowever this need to be scaled down to keep total demand fixed

Step 4: Demand EffectDemand effect: Demand for the product (both imported and domestically produced) increases after a reduction in the average domestic price of the good.Demand elasticity: Percentage change in total demand (regardless of origin) for the good following a one percent change in the average domestic price.Total domestic consumption increasesThus there is an additional impact on imports and domestic production based on Demand elasticity to price.

PE - various effectsDue to tariff liberalization with B.

Pre-Packaged Software for PE analysisSMART UNCTAD/World Bank WITSTrade creation Trade Diversion - RevenuesMajor advantage: QUICK! data needed is already in WITS

Features:Tariff fully reflects on price (P ijk = P w (1 + T ikj)) No demand effect, demand is fixed.Quantities are calculated on the basis of pre-defined elasticities Import demand elasticity (pre defined)Export supply elasticities (infinite or fixed)Substitution elasticities across varieties (computed from trade and price data)

TRADE CREATION = Change in tariffs * Imports * d. elasticityTRADE DIVERSION = Imports * tariff gap * subst elasticities.REVENUES = change in tariffs * quantities.

Software for PE analysisTRIST World Bank website - Excel

Provide effects of trade policy reforms on revenues, imports and prices Major advantage: Based on data for actually collected revenue so collection efficiency and exemptions can be taken into account, includes revenues on VAT and excise tax (surcharges). Disadvantage: Underlining data is provided only for few countries. Allows for change in domestic demand due to lower prices

How TRIST works

TRIST data Needs

Software for PE analysisGSIM (to be implemented in WITS)Better treatment of World MarketSMART: heterogeneous products (NZL apples exported to EU are different than these exported to the US)GSIM: models world market for each product Implications World prices are endogenous (change in demand due to trade policy affects world prices)if demand of good g increases, it is not supplied only from the country where tariff has been reduced but from other countries as well.Homogeneous varieties (NZL apples are the same, wherever are exported)

Software limitationsResults depends on pre defined elasticities. But these can be imported into the softwareTrade policy restricted to tariffsNot well suited to assess policy related to other trade policies or costsNon-tariff measuresCost of complianceBehind the border issuesTrade facilitations

How to treat Non Traditional trade policy?Calculate an AVE and plug it into the software, but the policy needs to work the same as a tariffsquotas (impact prices/quantities) trade facilitations (impact prices/quantities?)

Directly calculate the effect of the policy/impediment on domestic prices, and or quantities exported or imported.Build your own PE model, or econometrics.

Part IIDistributional effects of trade policy

Government priorities

What is the priority?Maximize trade?Maximize short term growth? Maximize development potential?Social equity / inequality / distributional effects ?

One relevant question:Who benefits from trade policy reforms?Are benefit shared?Is someone going to lose? Who?What is the role of the government in distributing the gains from trade?

From prices and quantities to welfare and distributional effectsRevenues, Price and quantity effects are given by models but these changes do impact other aspects of the economy:

Social welfare Labor markets. wages and unemployment Distributional effects PovertyInequalityWomenRural areas

Requires country specific analysis

Why is trade policy redistributive?Economic sectors may be differently affectedImport competing sectors vs export oriented (imports intermediate inputs)Protection was not homogeneous across import competing sectors.

Stopler Samuelson TheoremProtection raises the real wage of a country's scarce factor and lowers the real wage of its abundant factor.

People are heterogeneous :Different Skills (skilled vs unskilled workers)Consumption baskets (tradables vs non tradables)Geography (Rural vs Urban areas)

FRAMEWORK: Linking TRADE POLICIES and PEOPLE

Step 1: Border Prices and quantitiesWhat is the impact of TRADE POLICIES on PRICES and QUANTITIES exported and/or imported and/or consumed.

Ex ante Forecast: Partial equilibrium models Computable general equilibrium models

Ex post analysis: Econometric estimation (time series) Simple assumptions of tariff pass thru.(ex: who captures change in tariffs? Importers or Exporters)

Data needs varies: trade and trade policy data, some elasticities.

Step 2a: Internal FactorsInvestigate internal factors impeding the transmission of border prices to domestic prices

Some questions to ask:Are prices free to change? or are administered? Who captures the effect from the tariffs change (government, consumers, traders ?) Is import exposure equal across areas of the country? (presence local substitutes)Are trade costs different across areas? (geography)

Data needs: information on the working of domestic markets (pass-thru tariff-price elasticity)

Step 3a: Impact on LaborIndirect impact of trade policy on other factorsWagesEmployment

2 options:Econometrics estimationAssumptions

Step 3b: Why policy affects people differently? Heterogeneity in consumption is the product into the household consumption basket?

Heterogeneity in sources of income agriculture, wage, private enterprises

Government transfers equally distributed?

How much of the household well being depends on products and sectors affected by trade policy?SubsistenceTradables vs non-tradables

Extensions: are the households able/willing to adjust? (hidden variables: risk aversion, vulnerability, skills, availability of alternatives)

Empirics: Data requirementsTrade dataThese that feeds into the PE modelsTariffs / trade / elasticitiesTime series of tariffs and prices (for estimating elasticities)Household dataHousehold characteristics (to group results with)Expenditure allocationSource of incomeBy activity (wages, labor)By sector (agriculture, products, industry, etc)

Empirics: The analysis, step by stepWORKFLOW:

Organizing and checking the HH data for misreporting and outliers.Produce some descriptive statistics to help with the understanding and analysis.Identify, model and estimate country specific issues.Measure the effect at the household level. Present your results at the individual level.

Step 1) Organizing the DataFind the data (survey are conducted for different reasons)

Understand the survey structure (representative, statistical design)

Identify the variables of interest(income, consumption, prices, characteristics, etc.)

Prepare the data: Household surveys come in various modules.MERGE, APPEND, RESHAPE, COLLAPSE

Merge the data with trade policy data: different datasets and classifications: Data from other sources needs to be reconciliated, and then merged (prices from national accounts, tariffs, trade HS, HH surveys)

Check for typos in the data, outliers, misreporting, inconsistencies... (income\expenditures), (education\age), (cultivation\region\land), (earnings\ec.sector).

Step 2) Basic analysisIllustrate consumption basket and income bundle of the poor

by pov: summ i_wage i_totagr i_enter i_other [w=ww]

---------------------------------------------------------------------------------> pov = 0

Variable | Obs Weight Mean Std. Dev. Min Max-------------+----------------------------------------------------------------- i_wage | 10627 3453060 77.76989 288.1763 0 12000 i_totagr | 10627 3453060 76.6366 297.2993 0 16536.67 i_enter | 10627 3453060 46.24133 261.8874 0 15003.67 i_other | 10627 3453060 21.87391 139.3512 0 10000

---------------------------------------------------------------------------------> pov = 1

Variable | Obs Weight Mean Std. Dev. Min Max-------------+----------------------------------------------------------------- i_wage | 6045 2713183 16.43147 80.81078 0 2500 i_totagr | 6045 2713183 54.68416 94.3769 0 5095 i_enter | 6045 2713183 16.52547 68.30296 0 2666.667 i_other | 6045 2713183 8.882253 35.78353 0 1166.667

For poverty income from agriculture is most important.

Graphsgraph hbar inc__ac inc__agric inc__labor inc__other inc__gov , over(xx)stack legend( label(1 "Non-monetary earnings") label(2 "Agriculture sale") label(3 "Labor earnings") label(4 "Other income") label(5 "Government transfers") ) b1title("Household income (Birr per month)")Agriculture income WagesOther incomeImpact of TradePolicies on these?

No need to model government spending (Why?)

Step 3) Additional issues: Modeling Price transmissionBorder prices are not those faced by the households (Why?)Estimate how movement in border prices is reflected in retail pricesEquation:

(Capture local changes in prices as a function of changes in prices at the border)

Example

Change-in-Price multiplier: different for every region (and product) (Why?)

Step 3) Additional issues: Modeling SubsistenceWhat is subsistence? Subsistence is a form of insurance from failing markets (Second best)What are its effects? Subsistence isolates hh from markets and softens the effect of trade policies. Questions you may want to explore: Do trade policies affect subsistence? (creation and disruption of markets) Costs of reducing subsistence? (infrastructures, access to credit) What are the gains from exiting subsistence? (market premium from staple to cash crop)Identify some complementary policies (which ones?) that decrease subsistence (how much?) in order to integrate households to markets (quantify market premium vs subsistence).

Which variables are correlated with subsistence?Can we do something to decrease subsistence? Run a regression. Identify correlates that can be give indication on possible policies.

. areg totsh_ac gender age hhld_siz asse_tot credit edu dis_food d1 dis_road d2 dis_tra d3 [aw=ww] , absorb(area)

------------------------------------------------------------------------------ totsh_ac | Coef. Std. Err. t P>|t| [95% Conf. Interval]-------------+---------------------------------------------------------------- gender | .032584 .0039162 8.32 0.000 .0249078 .0402602 age | -.000436 .0001094 -3.99 0.000 -.0006504 -.0002217 hhld_siz | .0056097 .0007937 7.07 0.000 .004054 .0071655 asse_tot | -.0229854 .0006796 -33.82 0.000 -.0243175 -.0216533 credit | -.0329434 .0051266 -6.43 0.000 -.0429922 -.0228946 edu | -.0056788 .0005513 -10.30 0.000 -.0067594 -.0045982 dis_food | .0060488 .0005249 11.52 0.000 .0050199 .0070777 d1 | -.0000976 .0000115 -8.48 0.000 -.0001202 -.000075 dis_road | .0039456 .0003461 11.40 0.000 .0032673 .0046239 d2 | -2.75e-06 3.18e-06 -0.86 0.387 -8.99e-06 3.49e-06 dis_tras | .0009729 .0002748 3.54 0.000 .0004342 .0015117 d3 | -.0000392 3.78e-06 -10.36 0.000 -.0000466 -.0000318 _cons | 1.346616 .0323482 41.63 0.000 1.28321 1.410022-------------+---------------------------------------------------------------- area | F(101, 16063) = 79.220 0.000 (102 categories)

Step 3) More Specific Issues: Labor MarketsPrices affects factor returns (capital but also labor)Model labor markets, adjustment with wages, employment.

Do trade policies affect employment/wages? (export growth?) Who gets the new jobs, who loses old jobs?

Are labor markets segmented by? sector geography skills

Labor Markets Increase in labor demand due to increase in exports.

Two ways of thinking about it.

Prices and labor marketsTime series information to link prices with wages (assumes productivity increase)Estimating a Mincer-type equation (wages on skills and economic sector dummies) from price and wage data.

Increase in output could be because of more employmentQuantity / employment elasticity (assumption: % change in export = % change in jobs)Who gets the jobs? Matching methods (econometrics)

Step 3) More Specific Issues: Allocating increases in exportsExample: improved market access increases exports of Fruits from SSA to the EU. Can the country benefit from it? (supply constraints)Who in the country benefits from it? (large/small producers?)Supply constraints vary within countryWho can produce more?Idling land, Marginal landProductivity increase Better access to fertilizerSwitch out of subsistence

Many of these information are available thru surveys.

Step 3) Specific Issues: effects on non- tradable goods and domestic varietiesWhat happens to the prices of other non tradable goods? (services)are prices correlated with tradables?, with wages? how much so?

What happens to prices of domestic produced varieties? (domestic corn)Shift in demand? are prices correlated? how much so? How much are imports relative to domestic production?

Step 4) Measure changes in welfare (real income) of HH - Household welfare functionChange in retail prices (from trade model + price estimation)Income and expenditure shares (from HH surveys) Change in quantities produced, purged by subsistence (from model + hh supply responses estimation/assumption)Policy driven change in subsistence (estimated)Market premium relative to subsistence (estimated)Change in wages, wage premium (estimated)

Step 5) Present the resultsChoose the unit of measurement: change in real income, people out of poverty, gini coefficient, etc.

Group by: income deciles, poor-non poor, geographic areas, ethnic group, gender, poverty mapping, etc.

Decomposition by effect/policy: Price (income, consumption). Quantities (increase in supply) Effect of complementary policies (subsistence, productivity)

Compare results from different scenarios and/or assumptions.

Presenting Results

To summarizeQuantify changes in prices and quantities due to trade policies. Tools: CGE / Partial equilibrium.

2) Translate these changes into retail prices (and factor returns) allowing for imperfect markets (country specific issues)Tools: Econometric estimations

3) Map those changes into household welfare functionTools: HH survey analysis

4) Calculate welfare effects and summarize the results.

ExerciseDistributional effect of a change in tariffs.Very simplified exerciseNo labor marketsNo revenuesOnly consumption and production effects.Intuition:Lower tariff = lower prices = consumers are better offLower tariff = lower prices = producers are worse off

Ex-post exercise (no forecast)Effect of tariff change between 1995 and 2001Ethiopia dataEffects on poverty

ExerciseLets Look at the data files:2 main files Tariffsuse ..:\Temp\Distributional_Effects\tariff_9501.dta", clearHouseholds survey Use ..:\Temp\Distributional_Effects\Ethiopia_hhsurvey.dta", clear

Describe and browse

Trade dataSome commands to understand what is going on.

summ tariff_1995 tariff_2001 Variable | Obs Mean Std. Dev. Min Max-------------+-------------------------------------------------------- tariff_1995 | 5022 .2885645 .2382734 0 .8 tariff_2001 | 5135 .1881876 .1323316 0 .4

. summ tariff_1995 tariff_2001 [w= imports](analytic weights assumed) Variable | Obs Weight Mean Std. Dev. Min Max-------------+----------------------------------------------------------------- tariff_1995 | 5022 666184.142 .1844485 .1682849 0 .8 tariff_2001 | 5135 630747.751 .1161763 .1054051 0 .4

sort typeby type: summ tariff_2001 tariff_1995(long output)...

Trade policy dataChange in border prices due to tariff

* calculate percentage points change in tariff between 1995 and 2001, this will give the change in the price of the good** This assumes that domestic prices = WorldPrice*(1+tariff). ** Therefore the domestic price in 1995 is WorldPrice*(1+tariff_1995) and in 2001 is WorldPrice*(1+tariff_2001)** Thus the % difference in domestic price is given by:

gen delta_price= ((1+ tariff_2001)/ (1+ tariff_1995))-1

Simplifying AssumptionsBorder prices react 1 to 1 to change in tariff (exporters do not raise prices, or capture part of the tariff change)

Quantities imported are fixedNo effect on import competing sectorsNo effect on demand

Household data* construct weights taking into account household size gen wgt_ind=wgt*hhld_siz* categorize the households by centiles depending on their per capita expenditures ** create total expenditures (including subsistance) egen totexpend_hh=rsum(expend* subsistence_inc)** create per capita expenditure taking into account equivalence scales gen pcexp_eq=totexpend_hh/eq_scale** building percentiles (by individuals, not households) xtile decile= pcexp_eq [w=wgt_ind], nq(10)

Why eq scales are not used in the weights?

Put everything in per capita terms* transform expenditures in per capita expenditures foreach x of local exp_cat { replace expend`x'= expend`x'/eq_scale }* transform income in per capita incomeforeach x of local inc_cat { replace i_`x'= i_`x'/eq_scale } * transform subsistence in per capita subsistencereplace subsistence_inc= subsistence_inc/eq_scale* saving the datasave "c:\temp\Distributional_Effects\temp.dta", replace

Consumption effects (merging)* keep only variables needed for consumptionkeep killil zone wereda town keftegna kebele ea hhld_id stratum wgt* subsistence* expend* decile pcexp_eq gender

* calculate mean total expenditures by each percentile egen totexp=rsum(expend* subsistence) * reshaping data to have product groups as a variablereshape long expend, i ( killil zone wereda town keftegna kebele ea hhld_id stratum gender) j(type) string

* merge price changes from trade policy datasort typemerge type using "c:\temp\Distributional_Effects\deltaprices.dta"drop _merge

Consumption effects (calculating)assuming that prices of non traded products are not affected by trade policyreplace delta_price=0 if delta_price==.

* calculating households expenditures with new pricesgen expendnew=expend*(1+delta_price)

* collapsing everything at the household level (no products) collapse (sum) expend expendnew (mean) decile pcexp_eq totexp wgt_ind, by (killil zone wereda town keftegna kebele ea hhld_id)

* freezing dataset for later preserve

Consumption effects (presenting)* calculate the consumption effect over total expenditures (including subsistence)** this is the % change in real income of each household due to changes in prices (from tariffs)gen cons_effect= -(expendnew- expend)/ totexp* approximating weights because non-integer in lpolygen ww=int(wgt_ind)* take log of pc expenditure for the graphgen lnpcexp=ln( pcexp_eq)* graph the consumption effect by log of per capita expenditureslpoly cons_effect lnpcexp [w=ww], bw(0.05)* un-pause by pressing "q"pause * saving data sort killil zone wereda town keftegna kebele ea hhld_idsave "c:\temp\Distributional_Effects\result_hh.dta", replace

Consumption effect ( by individual)Interpretation: Tariff reduction was higher for goods consumed by poor individualsTariff reduction allows the poor to increase consumption. Gains are larger for poor individuals

Consumption Effect (by decile)* restoring the data (from preserve)restore

* collapsing everything at the decile levelcollapse expend expendnew pcexp_eq totexp [w=wgt_ind], by (decile)

* calculate the consumption effect over total expenditures (including subsistence)** this is the % change in real income of each household due to changes in prices (from tariffs)gen cons_effect= -(expendnew- expend)/ totexp

* saving data keep decile cons*sort decilesave "c:\temp\Distributional_Effects\result_decile.dta", replace

Income Effectuse "c:\temp\Distributional_Effects\temp.dta", clear* keep only variables needed for incomekeep killil zone wereda town keftegna kebele ea hhld_id stratum wgt* subsistence* i_* decile pcexp_eq * calculate mean total expenditures by each percentile egen totinc=rsum(i_* subsistence)* reshaping data to have product groups as a variablereshape long i_, i ( killil zone wereda town keftegna kebele ea hhld_id stratum subsistence) j(type) string* merge price changes from trade policy datasort typemerge type using "c:\temp\Distributional_Effects\deltaprices.dta"drop _merge* assuming that prices of wages and services are not affected by trade policyreplace delta_price=0 if delta_price==.

Income Effects* merge price changes from trade policy datasort typemerge type using "c:\temp\Distributional_Effects\deltaprices.dta"drop _merge* assuming that prices of wages and services are not affeted by trade policyreplace delta_price=0 if delta_price==.* calculating households income with new pricesgen i_new=i_*(1+delta_price)* collapsing everyting at the household level collapse (sum) i_ i_new (mean) decile pcexp_eq totinc wgt_ind subsistence, by (killil zone wereda town keftegna kebele ea hhld_id)* freezing dataset for later preserve* calculate the income effect over total income (including subsistence)** this is the % change in real income of each household due to changes in prices (from tariffs)gen inc_effect= (i_new- i_)/ totinc* approximating weights because non-integer in lpolygen ww=int(wgt_ind)* take log of pc expenditure for the graphgen lnpcexp=ln( pcexp_eq)* graph the consumption effect by log of per capita expenditureslpoly inc_effect lnpcexp [w=ww], bw(0.05)

Income Effect by individualInterpretation:Tariff reduction produces larger losses for the people in the middle of the distributionVery Poor do not sell agricultural productsVery rich earn their income from something else (wages)

Put income and consumption together

* merging with consumption effects and savingkeep killil zone wereda town keftegna kebele ea hhld_id inc_effectsort killil zone wereda town keftegna kebele ea hhld_idmerge killil zone wereda town keftegna kebele ea hhld_id using "c:\temp\Distributional_Effects\result_hh.dta"drop _mergeegen overall=rsum(inc_effect cons_effect)sort killil zone wereda town keftegna kebele ea hhld_idsave "c:\temp\Distributional_Effects\result_hh.dta", replace

Check for some issues: Subsistence and Wages* graphs for shares of subsistence and wagesuse "c:\temp\Distributional_Effects\temp.dta", clearkeep killil zone wereda town keftegna kebele ea hhld_id stratum wgt* subsistence* i_* decile pcexp_eq gender

* setting variable to zero when missingreplace subsistence=0 if subsistence==.replace i_wage=0 if i_wage==.* calculating sharesegen totinc=rsum(i_* subsistence)gen share_subsistence= subsistence_inc/totincgen share_wage= i_wage/totinc* approximating weights because non-integer in lpolygen ww=int(wgt_ind)* take log of pc expenditure for the graphgen lnpcexp=ln( pcexp_eq)lpoly share_subsistence lnpcexp [w=ww], bw(0.3)pauselpoly share_wage lnpcexp [w=ww], bw(0.3)

subsistenceSubsistence is widespread, but on average accounts for less than 20 percent of incomeSimplifying assumption: Subsistence is isolated from tariff shocks

wagesWages are not very important Wages are more important for the very poor and the richNot important for the people in the middle of the distributionLabor Market should be probably treated, if data allows

Overall Results

********* OVERALL RESULTS

* merging with consumption data and saving keep decile inc*sort decilemerge decile using "c:\temp\Distributional_Effects\result_decile.dta"drop _merge

* calculating overall effectsegen overall_effect=rsum(cons inc)

* listing results by decilelist decile *

Results by decile. * listing results by decile (% change in real income)list decile *

+---------------------------------------------------+ | decile decile inc_eff~t cons_e~t overal~t | |---------------------------------------------------| 1. | poor1 1 -.0510372 .1372392 .086202 | 2. | 2 2 -.0572946 .1345364 .0772418 | 3. | 3 3 -.0611172 .1327047 .0715875 | 4. | 4 4 -.061423 .1304159 .0689928 | 5. | 5 5 -.0566574 .127569 .0709116 | |---------------------------------------------------| 6. | 6 6 -.0634309 .1236198 .0601889 | 7. | 7 7 -.0708388 .1230599 .052221 | 8. | 8 8 -.0649193 .1166065 .0516872 | 9. | 9 9 -.0457354 .107587 .0618516 | 10. | rich10 10 -.0229105 .0724465 .049536 | +---------------------------------------------------+

Tariff change is pro-poor as benefits the poor more than the rich

Distribution of results by region*plot over regions graph box overall [w= wgt_ind], over ( killil , label(labsize(vsmall)))

Extension to this exerciseImperfect pass-thru (estimates)Wages (price wage elasticity)Impact on Subsistence (subsistence vs market)Non tradable goods (effect of tradable prices on other goods)

Assumptions for PE in trade policyAssume there are two countries, the United States and Mexico. The analysis can be generalized by assuming one of the countries is the rest of the world.Each country has producers and consumers of a tradable good, wheat. The analysis can be generalized by considering broad classes of products, like manufactured goods, or services.Wheat is a homogeneous good. All wheat from Mexico and the United States is perfectly substitutable in consumption.The markets are perfectly competitive.We assume that the two countries are initially trading freely. One country implements a trade policy and there is no response or retaliation by the other country.

Some References Deaton, Angus (1997), The Analysis of Household Surveys: A Microeconometric Approach to Development Policy; The World Bank.Feenstra, R. C. (1989), Symmetric Pass-through of Tariffs and Exchange Rates under Imperfect Competition, Journal of International Economics. 27: 27-45.Goldberg P. and M. Knetter. (1997). Good Prices and Exchange Rates: What Have We Learned?, Journal of Economic Literature; 35:1243-1272.Grosh, Margaret E. and P. Glewwe (1995), A Guide to Living Standards Surveys and Their Data Sets, LSMS Working Paper #120, The World Bank.Harrison, Ann (2007), Globalization and Poverty; University of Chicago Press for National Bureau of Economic Research.Nicita, Alessandro, (2004), Who benefited from trade liberalization in Mexico? Measuring the effects on household welfare". World Bank policy research working paper No. 3265. also published in the Journal of Development Economics.Nicita, Alessandro (2007) "Ethiopia" in Global Trade and Poor Nations. The Poverty Impacts and Policy Implications of Liberalization, B. Hoekman and M. Olarreaga (eds), BrookingsNicita, Alessandro, (2008) "Who Benefits from Export-led Growth? Evidence from Madagascar's Textile and Apparel Industry" Journal of African Economies, vol. 17(3), 465-489 Porto, Guido (2003), Using Survey Data to Assess the Distributional Effects of Trade Policy; World Bank Policy Research Working Paper 3137. also published in the Journal of International Economics. Porto, Guido (2004), Informal Export Barriers and Poverty; World Bank Policy Research Working Paper 3354. also published in the Journal of International Economics.Robertson, Raymond (2004) "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, vol. 64(2), 387-409. Singh, Inderjit, Lyn Squire and John Strauss (eds.). (1986). Agricultural Household ModelsExtensions, Applications and Policy. Baltimore: The Johns Hopkins University PressWinters, L. A. (2002). Trade liberalisation and poverty: what are the links? World Economy (U.K.); 25(9), 1339-67.

Remittances, government.I am not going to discuss those here since we saw then last week. I am not going to discuss those here since we saw then last week. I am not going to discuss those here since we saw then last week. Now you are all set (or at least you think so), data is there, the methodology is done, and it is time to produce something.Just to have an idea what are the most important items in the welfare function of poor households.You may want to look at other things such as remittances, gov, specific crops ,etc

Price transmission is probably the most important (LDC) Simplest model. Imagine two household one living in Addis Ababa and another in the desertic Somali region. There is no reason to believe that the price they face react in the same way to movement in the border prices.Subsistence= insurance for failing markets. Ethiopia subsistence is very high. About 50 % of income comes from subsistence.Can we identify any policy able to reduce subsistence and improve market participation of households. or improve productivity and supply for external markets.Not very important in Ethiopia. Wages are not an important component of income of poor households.Assuming that increase in international demand is supplied by an increase in productivity Increase in productivity of marketed production.