T1 Model Flow Diagrams
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1 Slide 1 T1 Model Flow Diagrams M.C. McCracken Nancy Cebryk Informetrica Limited November 2003
2 Slide 2 T1 Flows (11/03) Demography Stocks of Wealth Final Demand Foreign Linkages Disposable Incomes Government Redistribution Earned Incomes Final Demand Prices Major Aggregates Industry Prices&Wages Financial Sector Industry Output Employment Capital Stock Demography Labour Force Exogenous blocks are denoted by an ellipse. Endogenous blocks are rectangles. Red arrows are major linkages affecting final demand and industrial output. Blue arrows indicate price determination.
3 Slide 3 Focus on Blocks Identify Inputs to Block Explain Major Concepts General Form of Specification The block structure is a common way of discussing models and fits well with the MOSAIC/SIMSYS system used to manage the models. In each of the model sectors we provide a diagram showing the principal linkages.
4 Slide 4 Final Demand Demography Foreign Linkages Stocks of Wealth Final Demand Financial Sector Disposable Incomes Final Demand Prices Industry Output Employment Capital Stock
5 Slide 5 Final Demand Concepts Consumer Expenditures Residential Construction and Housing Business and Government Investment Inventory change Government Current Expenditures Exports Imports Our approach is to specify all of these blocks in current dollars. We then take prices from the final demand prices block and deflate to obtain real expenditures. Note that Fisher-weighted price indexes have the same weights as Fisher quantity indexes. In this way we are modeling the outlays in nominal terms, testing for money illusion. Prices are modeled independently. The real spending satisfies the identity that C = P*K.
6 Slide 6 Final Demand Prices Foreign Prices Energy Prices Industry Unit Labour Costs Indirect Taxes Detailed Final Demand Prices Aggregate Price Our present prices model can be thought of as a reduced form equation, linking final demand prices to the basic price drivers unit labour costs, energy prices, and indirect taxes. In some cases the exchange rate may enter directly export and import prices. In other instances it may be linked to energy prices through a rule of world oil price landed in Canada in Canadian dollars.
7 Slide 7 The Aggregation of Prices and Quantities CSNA has adopted Fisher indexes for final demand expenditures (shortly for GDP by industry) Weighted averages of prices or quantities, using expenditure weights Annual model use a regression model to link to a chain index, using previous period expenditure weights
8 Slide 8 Consumption and Savings Demography Consumption Prices Personal Disposable Income Detailed Consumption Total Consumption Personal Saving
9 Slide 9 Consumer Expenditures Most categories in CSNA: Table 16 & 17 Additional detail to link to other models Durables (coming) Semi-durables(coming) Nondurables(coming) Services(coming) The detail in the model kept growing as we sought better equations and to link to other models (e.g., energy). Eight equations became 21, with some additional items to complete identities. The major four components need to be added, requiring only some further disaggregation to separate goods and services in a few places.
10 Slide 10 Consumption Specification Dependent variable nominal consumption per capita Per capita household, person, Adult-equivalents Explanatory variables Income personal disposable income or discretionary income Relative price Others Stock of autos Form log-log
11 Slide 11 Clothing & Footwear CHCFAC = *CSTRRC *(CSTRPC+CSMPAC)+HLTOTL * EXP(B+B*LOG(PYPTDC/HLTOTL) + B*LOG(CTTOTP) + B*LOG(CHCFAP) + B*LOG(PTTOTL/HLTOTL) + B*LOG(TOTLET/(PTTOTL-PT0014))) The first two elements adjust for the fact that the detail of consumer expenditure is recorded on the basis of sales in Canada. So CHCFAC represents total sales of clothing in Canada. But conceptually, we want to focus on explaining total clothing purchased by Canadians wherever they buy it, and exclude that bought in Canada by tourists from other countries. Essentially, we remove these components before estimating the equation, and then add them back in in the model to align with the SNA concept. Note that the total consumption identity reverses this effect by adding purchases abroad by Canadians and subtracting purchases by foreign tourists in Canada. (These two types of transactions are also included under exports and imports of services.) The estimated equation is a simple equation with: Income Disposable Income per household Prices Clothing price (CHCFAP) and aggregate consumption price (CTTOTP) Demographic Factors Population per Household and employment relative to source population
12 Slide 12 Residential Construction and Housing Housing Starts Single and Multiple Types New construction Housing Stocks Renovations Ownership Transfer Costs Sales of New & Existing Dwellings Features: Split of new construction by housing type. Detail by type and stocks used by energy models Move from starts through under construction to completions to sales
13 Slide 13 Housing Employment Income Interest Rates Sale Price Demography Housing Alterations Housing Stock Other Consumption Housing Starts Housing Under Construction Housing Completions Sales of New Dwellings Final Energy Demand Value of new Construction Transfer Costs Residential Structures Investment
14 Slide 14 Business Investment Structures and M&E Structures by Buildings and Engineering Added floor space M&E by 10 types of equipment available Transportation Equipment (3) Computers, Software & Telecommunications (3) Machinery (4)
15 Slide 15 Investment Interest Rates Investment Prices Industry Employment Industry Output Investment By Asset Type Total Capital Stock By Asset Type Investment
16 Slide 16 Farm Grain (x) Other Farm (x) Non-farm Manufacturing Durables Nondurables Other Business (x) Gold (x) Government (x) Inventory Change For a long-term model, the key characteristic is that stock-sales ratios behave sensibly. As well, we want the commodity detail to fit with the input-output framework. We may revisit the other non-farm inventory change in the future and use a simple equation to track with long-term stock-sales ratio.
17 Slide 17 Government Expenditures Investment Structures M&E Residential (small & exogenous) Gross Current Expenditure on Goods and Services Sales of Goods and Services The wage bill is incorporated into the estimates. Breakout by level of government with separate defence outlays federally has been incorporated. Detail of investment by type is available for total government. Investment by level of government is estimated consistently with the total investment.
18 Slide 18 Exports & Imports 20 Goods 5 Services By direction with US and ROW split (planned) About same level of detail for Exports and Imports Current, price, and real Desire to link with energy model and to exploit available detail for use in IO model led to additional disaggregation. We stated with 9 goods categories but ended up with much more ( 20 ). Similar story with services.
19 Slide 19 Industry Dimensions Final Demand Industry Output Employment Capital Stock
20 Slide 20 Industry Dimensions Detail Investment Industry Capital Stock Industry Employment Final Demand Industry Output Capital Stock is based on the accumulation of past investments less discards. (Gross Capital Stock Measure) In T1, a simpler industry spread of investment or capital stock may be required, if investment functions by industry are not readily available. Industry output links the final demand to the industry producing space, using either an input-output table, linking equations, or some combination thereof. Industry employment is simply an inverted production function or productivity equation, with capital stock, industry output, and perhaps the vintage of the stock serving to drive the employment needs.
21 Slide 21 Determination of Industry Output Final Demand D-E Converter Matrix Technology Matrix Inverse (I-DB) -1 Value Added Share Matrix (B*) I/O Estimate Gross Output Gross Domestic Product
22 Slide 22 Industry Output Industry Detail (100 industries) 5 Supersectors 20 NAICS industries or 20 sectors Selected energy-related sectors
23 Slide 23 Industry Capital Stock Elements Disaggregate Structures into Buildings and Engineering Disaggregate M&E by Type ICT (3) Machinery (4) Transport Equipment (3) Identities Age of Capital Stock Floor Space The accounting for capital stock is nothing more than the sum of previous period capital stock, current year investment, reduced by Scrappage. For short-lived investments, Scrappage can be linked to past investment flows. Longer term lives, use exogenous variables. Stocks will be dated as of the end of the year. The average nameplate date can be calculated here, along with the average age of the capital stock. These variables are useful in lieu of a time trend in productivity equations.
24 Slide 24 Labour Markets Demography Gross Domestic Product Capital Stock Labour Supply Employment Employment By Age/Sex Unemployment By Age/Sex Participation Rates Wage Bill Prices Unemployment Rate This chart provides an interesting overview of the labour market part of the model. Note particularly the age-sex employment and unemployment modules.
25 Slide 25 Industry - Employment Labour Force Survey as main set of data May use I-O employment data for location of work when available Some form of productivity equation as underlying specification 38 behavioral equations, 56 measures Employment by age and sex for aggregate industries (17) At present, we have not disaggregated manufacturing or the resource sectors by age and sex. The methodology is to start with a base year matrix, use total labour force by age-sex and industry total employment as row and column constraints. We then apply an ras process to the matrix to ensure consistency with the sums. Note that unemployment is treated as an industry, both in the base year and through the adjustment process. This ensures that unemployment stays positive for each age-sex group. Current disaggregation is ten-way breakdown, with male- female, and young (15-19, 20-24), prime 25-54, older groupings (Ages 55-64, 65+). Distinction between married and single or with or without children is another dimension of gender that may be introduced later.)
26 Slide 26 Industry Employment Specs Target Productivity Level Adjustment Process over several years Consider Hours and People, with faster adjustment by hours Use capital stock ages, with weights from type by industry Much of the capital stock, particularly buildings and equipment are leased. It is not clear if there is a direct link between capital stock and employment, except in particular sectors. Indeed, in some the linkage between the two may be positive, not negative (e.g., pipelines). In any event there may be too little information and too short a time series to establish meaningful capital-labour substitution at the detailed industry level. Employment = f( E<t-1>, Y, Y<t-1>, trend productivity &/or vintage of K)
27 Slide 27 Labour Force Specs Participation rates driven by employment ratios and other options Education Fertility Source population Labour Force by age-sex Unemployment by age-sex Stability issues Participation rates are estimated at same level of disaggregation as employment. Current disaggregation is ten-way breakdown, with male- female, and young (15-19, 20-24), prime 25-54, older groupings (Ages 55-64, 65+). Distinction between married and single or with or without children is another dimension of gender that may be introduced later.) Source population is simply a transfer from the population calculator subject to definitional changes that may be outstanding because of different data revisions. Labour force is an identity, the product of participation rates and source population. Unemployment rates by age and sex are identities, calculated using the unemployment industry estimates relative to the corresponding labour force These unemployment rates should not be used on the right-hand side of equations in this or other blocks, unless with a lag. As well, we will need some experience to determine the robustness of the underlying mechanism.
28 Slide 28 Linkages with Foreign Economies Foreign prices Interest rates Economic activity Foreign equity markets This block allows some endogenous relationships for foreign economies to be included in the model. For example, foreign price assumptions could be posited in relative price terms, as a ratio to the GDP deflator in the US. In this block such prices could be converted into price indexes by multiplying by the US GDP deflator. Assumptions about GDP in a number of countries could be combined here to create a trade-weighted demand index. Import prices are defined as a function of foreign prices, the exchange rate, and economic conditions in Canada. Recent history suggests that not all price pressures come through in a weak market.
29 Slide 29 Industry Wages and Prices Major Aggregates Financial Sector Industry Prices&Wages Industry Output Employment Capital Stock Labour Force This block brings together the factor markets, with labour and capital returns determined, along with the institutional effects of government rules and standards (e.g., minimum wage rates, supplementary labour costs) and the effects of interest rates as set by the central bank. The macro environment is reflected by CPI measures from the major aggregates and unemployment rates as determined by the labour force block. Exchange rate influences will also be felt from the financial block. If there is a Phillips curve or NAIRU statistically identified in the model it is in this block. Otherwise it will be among the rules governing monetary policy in the financial sector. The degree of industry disaggregation will be data-determined. Until such time as there is a times series of input-output tables, detailed industry wage and price data will not be available. It is possible to only have only a few wage rate equations since it is conceivable that the law of one price would work across indsutries and regions. Another possibility is to estimate occupational wage equations, with industry relationships simply a linear combination of such wage rates. Industry prices can be linked to wage, interest rate, and productivity variables. Energy prices can be kept separate.
30 Slide 30 Industry - Wages Minimum wage rate (rules) Mainstream wage rates (25 industries) Supplementary Labour Costs CPP/QPP EI Premium Workers Compensation Private Pension Private Health Within the SNA, we have exhausted the available disaggregation, using net wages with supplementary labour costs disaggregated into five components.
31 Slide 31 Industry - Prices Domestic Energy Prices Unit labour costs Unit capital costs
32 Slide 32 Final Demand Prices Final Demand Prices Foreign Linkages Government Redistribution Industry Prices&Wages The final demand prices are nothing more than the translation of the industry prices into commodity space, with adjustments for indirect taxes applied by governments and import prices. Any behavioral responses to economic conditions (e.g., lower margins) should take place in the industry prices section. However, it may be easier to model retail margin changes at the final demand price level, as long as there is some feedback to the industry prices or earned incomes section for consistency.
33 Slide 33 Final Demand Prices Import Prices Indirect Tax Indexes GDP Expenditure Deflators Components of CPI CPI (fixed weights) This block will be mainly identities or estimated identities. Note that the CPI should be estimated here since the components of consumption prices can be combined with the CPI weights. This is preferable, since the CPI is used elsewhere for indexing and should be recalculated whenever final demand prices change during simulation.
34 Slide 34 Earned Incomes Earned Incomes Industry Output Employment Capital Stock Industry Prices&Wages The main focus here is on determining the allocation of GDP across the factors of production, including the total wage bill, unincorporated income, net investment income, CCA, and indirect taxes. An accurate determination of GDP from the income side is important in ensuring a balanced model with respect to impacts and long-term relationships.
35 Slide 35 Earned Incomes GDP at Market Prices (less) Net Taxes on factors and products GDP at Factor Cost, Current Dollars Wage Bill Unincorporated Income Farm and nonfarm IVA Net Interest Income Depreciation (CCA) Corporate Profits (residual) Table 1 of the SNA, defined in nominal terms. At present, we start with the final demand in current dollars, net off indirect taxes and subsidies to obtain GDP at factor cost. This is then allocated across identified income components, with corporate profits taken as the balancing residual item. This fits with the logic of the economy, as well as leaving the most volatile item as the residual. The only caution is to avoid using corporate profits as a right-hand side variable elsewhere in the model!
36 Slide 36 Redistribution, Incomes, and Wealth Disposable Incomes Wealth Stocks Demography Government Redistribution Labour Force Earned Incomes This block determines most of government revenues (except for royalties, indirect taxes and profits of government enterprises). Earned incomes from various sectors are the main drivers, along with demographic linkages for the transfer programs. UI or EI benefits are shown here. Interest rates on government borrowing are an input here, although the rate is set in the financial sector block. Since redistribution seems to be partly determined by the fiscal state of the government, we have added the rest of the calculations of debt ratios, balances, etc. here in case we wish to impose some simulation rules to reflect fiscal behaviors.
37 Slide 37 Government Redistribution Revenue Transfers EI CPP/QPP OAS/GIS To other levels of government Interest on Debt Balances Debt and Assets Federal, provincial with universities and hospitals combined, and local separately, and CPP/QPP All in nominal terms Exhaustive spending comes from final demand (current and investment). Some revenues will come from other blocks where it is earned or where taxes are applied.
38 Slide 38 Disposable Incomes Personal Income Sectoral Disposable Incomes Personal Saving Business Saving Nonresident Saving Government Saving This block is a set of identities that combine the earned incomes and the redistribution block to define the disposable income of each sector. The saving rates in both net and gross terms are defined here. All flows are defined in nominal terms.
39 Slide 39 Personal Sector Stocks of Wealth Financial Assets Financial Liabilities Net Non-financial Assets Net Worth Corporate Sector Net Worth Market Value of Equities Main objective here is to establish the basic asset/liability amounts to support the interest income of households, possible effects on household behavior, and consumer interest payments. This block is an extension of the disposable incomes block, simply updating asset balances with the flows. This block will be developed further after the end of 2004 when market values of assets become available by sector. This will then allow meaningful use of wealth indictors in final demand blocks.
40 Slide 40 Major Aggregates GDP at market prices GDP (income side) GDP (industry output) GDP aggregate deflators Output Gap Any aggregation using Fisher weights would be done here. This block is used to simply calculate the necessary aggregates and to indicate possible differences between the various measures. The output gap can be calculated by a variant of Okun s Law as a check on the model properties. It may be used as a variable in other blocks.
41 Slide 41 Financial Sector Monetary policy rules Can-US differentials Taylor-like rules Other options Interest rate structure Short-term government and corporate Long-term government and corporate The way in which the arrows flow in this block will depend on the rules being followed by the monetary authorities. One rule might have them follow US interest rates in lock-step. Another rule may have them respond to domestic price signals in a single-minded fashion. Some balanced rule will also be included for certain long-term simulations, with a multiple objective function, including inflation gaps and output gaps.
42 Slide 42 Exchange Rates Relative interest rates Relative inflation Commodity prices An exchange rate equation is specified although it may also be over-ridden as necessary by making it exogenous (a fixed rate) or integrating it with the interest rate rules.
43 Slide 43 Regional Dimensions Priorities GDP by industry by Province and Territory Employment by Industry Labour market and Population Housing Disposable Income CPI The initial priorities were to include the main variables that we had in RIM and that clients were using. The potential expansion exists for a number of areas. The question is what is useful to pursue?
44 Slide 44 T1 Flows Regional Demography Stocks of Wealth Final Demand Foreign Linkages Disposable Incomes Major Aggregates Financial Sector Government Redistribution Earned Incomes Final Demand Prices Industry Prices&Wages Industry Output Employment Capital Stock Demography Labour Force Exogenous blocks are denoted by an ellipse. Endogenous blocks are rectangles. Red arrows are major linkages affecting final demand and industrial output. Blue arrows indicate price determination. Green boxes are those that can be regionalized.
45 Slide 45 T1-R1 Stable Distribution of Industrial Output by Province Productivity Matrix Employment by Industry by Province Incomes Labour Force CPI Housing starts and stocks Building investment and floorspace
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