Research Reports
A Preliminary Study for Developing a World Agricultural Trade Model
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AuthorRhew, Chanhee
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Publication Date2016.01.26
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Original
Research Background
This study aims at conducting a preliminary research to provide a guideline for designing a world agricultural trade model to be developed. Trade liberalization has been rapidly expanded across the world. As a result, external changes and/or shocks, including seemingly unrelated ones, are more likely to have direct impact on a nation’s economy as a whole. The Korean agricultural sector can be no exception. Given the fact that many agricultural commodities in Korea have been heavily dependent on imports, it is evident that the country’s agricultural sector is anticipated to be more vulnerable to any (un)expected changes. In this sense, providing timely information regarding external events is imperative to help the sector cope with such shocks.
It is, however, to be noted that previous equilibrium or trade models have not properly worked to meet such an end, at least in the context of Korean agriculture. Therefore, importance of developing a world agricultural trade model to serve specific needs and also provide tools measuring the impacts stemming from external changes can not be too empathized.
Research Methodology
In order to carry out this study, a number of methods are employed including reviewing major trade models, designing and building up supply-demand equations, followed by statistical inference. A large attention is paid to economic theory and availability of data to provide a sturdy ground for the model to be developed. Based on proposed model structure, a very brief model regarding world orange trade is built up to validate model performance and carefully scrutinize any potential problems.
Conclusion and Implication of Research
Amongst four widely used models, the FAPRI model, in spite of some caveats, may be a benchmark for the model to be developed. In particular, the way of constructing “home” and “world” models separately can be inferred when developing a world agricultural model. Once the model is developed, it can be linked and interacted with a well-structured domestic (“home”) model. Compared to developing another domestic model, the proposed alternative is believed to be more reliable and cost-effective. Out of some candidates, the Korea Agricultural Simulation Model (KREI-KASMO) developed by the Korea Rural Economic Institute (KREI) appears fit best for this end.
The model proposed in this study is a dynamic, recursive, multi-market, partial equilibrium one. A developing process goes as follows. First, for a certain commodity, supply and demand equations are built up in major countries to withdraw excess supply and/or demand. Second, export/import relationships are created based on the trade flow and then estimated to calculate world reference price. The equilibrium price is converted into each country’s import price via price transmission function. All the relevant commodity markets are to be linked in any given year such that multiple market can be cleared simultaneously. In that the world price in a given year may have lingering effects on supply and demand sides, a dynamic property should be reflected in the model.
Main commodities to be analyzed should be selected based on their importance in terms of value of production and trade in Korea. In line with this criterion, major trading partners for those commodities have to be included in the model.
A brief guideline on how to design model structure for a certain commodity is introduced for field crop, livestock, and fruit and vegetable sectors. For field crop and vegetables, required data may be more handily collected whereas data collection for livestock and fruit models may be more challenging. This hardship leads this study to suggest, as the second best alternative, the livestock and fruit sector models had better take a ‘reduced’ form.
Based on preceding steps, a brief orange model is developed as a test bed. All the estimation results are in line with expectation from economic theory. Explanatory power and model validation results are satisfactory. Comparing a baseline and alternative scenarios indicates that external shocks may affect Korean domestic markets in various ways and magnitudes.
This study can not be free from some limitations, which are mostly found when designing the model and building up a data base. Such problems should be addressed when empirically developing the model.
Researchers: Rhew Chanhee and Lee Sanghyeon
Research Period: 2015. 1. ~ 2015. 10.
E-mail address: chrhew@krei.re.kr
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