Empirical Research Methods

Empirical Research Methods
Prof. Dr. Dr. h.c. P. Michael Schmitz Giessen University Tashkent; July 2014 Lecture in the frame of the SAMUz project

Part I

Cost – Benefit Analysis
Outline Definition Principles of applied welfare economics a) Welfare measurement for individuals b) Aggregated welfare measurement Welfare measurement in a closed economy a) without state intervention: technological progress increase of real income b) with state intervention: taxes/subsidies Welfare measurement in an open economy

Cost-benefit analysis -what is it about?-
Government must make decisions regarding the adoption of public policies and projects. The branch of economics that deals with how to evaluate proposed policies/projects is known as cost-benefit-analysis or applied welfare economics

Cost-Benefit-Analysis or Applied Welfare Economics
Objective How to use resources optimally to achieve the maximum well-being for the individualls in society or more simply to help society make better choices

Principles of applied welfare economics I
“Welfare economics is the study of how the allocation of resources affects economic well-being” (Mankiw, 2004, p. 138). Assumptions: welfare increases with an increase of the consumtion the social welfare is the sum of the welfare of all individuals utility can be measured cardinally and the utility of individuals can be compared allocation of resources depends on the followed policy consumer sovereignty partial analysis

Principles of applied welfare economics
- Starting points - perfect competition no external effects Kaldor-Hicks criterion (compensation test): „State B is preferred to state A if at least one individual is made better off without making anyone worse off – not that all individuals are actually worse off – by some feasible redistribution (compensation) following the change. (Just et al., 2004, p. 32) the Pareto criterion is not used („if it is possible to make at least one person better off when moving from state A to state B without making anyone worse off, state B is ranked higher by society than state A“ Just et al., 2004, p. 15) a reference system is used

Welfare measurement of a single consumer I
Conditions: utility is difficult to be observed and to be measured approximation for the measurement of utility: monetary units but: income and consumption decisions at various prices are observed and based on that money-based measurements of welfare effects are measured (Just et al., 2004, p. 98) !!!!!!

Four possible Buyers’ Willingness to pay
John Paul George Ringo 100 80 70 50

The Demand Curve Quantity of Albums Price of Album (€) Demand
Willingness to pay John 100 80 Willingness to pay Paul 70 Willingness to pay George 50 Willingness to pay Ringo 1 2 3 4 Quantity of Albums

Measuring Consumer Surplus with the Demand Curve
Price of Album (€) (a) Price = € 80 Demand John’s Consumer Surplus (€ 20) 100 80 70 50 1 2 3 4 Quantity of albums

Measuring Consumer Surplus with the Demand Curve
Price of Album (€) (b) Price = € 70 Demand Consumer Surplus John (€ 30) 100 Consumer Surplus Paul (€ 10) 80 70 Total Consumer Surplus (€ 40) 50 1 2 3 4 Quantity of Albums

How the Price Affects Consumer Surplus
Consumer Surplus at different Prices Price A B C Demand Initial Consumer Surplus Consumer Surplus to New Consumers Additional Consumer Surplus to Initial Consumers P1 Q1 D E F P2 Q2 Quantity

Welfare measurement of a single consumer II

Welfare measurement of a single consumer II
Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it. Consumer surplus measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price.

Production Costs of Four Possible Sellers
Maria 900 Luise 800 Georgine 600 Grandmother 500

The Supply Schedule Price (€) Sellers Quantity supplied  900
Maria, Luise, Georgine, Grandmother 4 800–900 Luise, Georgine, Grandmother 3 600–800 Georgine, Grandmother 2 500–600 Grandmother 1  500 None

The Supply Curve Price (€) Supply 900 Maria‘s cost 800 Luise‘s cost
Georgine‘s cost 600 500 Grandmother’s cost 1 2 3 4 Quantity

Measuring Producer Surplus with the Supply Curve
(a) Price = € 600 Price (€) Supply 900 800 600 500 Grandmother’s producer surplus (€ 100) ’ 1 2 3 4 Quantity

Measuring Producer Surplus with the Supply Curve
(b) Price = € 800 Price (€) Supply Total producer surplus (€ 500) 900 800 600 Georgine’s producer surplus (€ 200) 500 Grandmother’s producer surplus (€ 300) 1 2 3 4 Quantity

How the Price Affects Producer Surplus
(a) Producer Surplus at Price P1 Price Supply B C A P1 Producer Surplus Q1 Quantity

How the Price Affects Producer Surplus
(b) Producer Surplus at Price P2 Price Additional producer surplus to initial producers Supply D E F P2 Q2 Producer surplus to new producers B P1 C Initial producer surplus A Q1 Quantity

Welfare measurement of a single producer

Producer surplus equals the amount sellers receive for their goods minus their costs of production. Producer surplus measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.

Welfare measurement of a single producer and consumer

Principles of applied welfare economics -aggregation over individuals-

Social Welfare -the surplus concept-

Social Welfare -the willingness to pay concept-

Social Welfare -the surplus and the willingness to pay concept-

Both concepts should give the same result!
Social Welfare Willingness to Pay concept (direct) W = WtP – VC W Welfare WtP Willingness to Pay („Nutzen“) VC variable costs Surplus concept (indirect) W = CS + PS W welfare CS consumer’s surplus PS producer’s surplus Both concepts should give the same result!

Efficieny of the market equilibrium
With the help of consumer and producer surplus we can answer the following question: is the allocation of resources through the market function somehow wished? The allocation of the resources is efficient when the maximum total surplus is achieved

Figure 8 The Efficiency of the Equilibrium Quantity
Price Supply Demand Value to buyers Cost to sellers Equilibrium quantity Cost to sellers Value to buyers Quantity Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. Copyright©2003 Southwestern/Thomson Learning

Efficieny of the market equilibrium
With the help of consumer and producer surplus we can answer the following question: is the allocation of resources through the market function somehow wished? The allocation of the resources is efficient when the maximum total surplus is achieved

Evaluation of the market equilibrium
Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. This policy of leaving well enough alone goes by the French expression laissez faire.

Three Insights Concerning Market Outcomes
Market Efficiency Three Insights Concerning Market Outcomes Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. Free markets allocate the demand for goods to the sellers who can produce them at least cost. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.

Social Welfare Willingness to Pay concept (direct) W = WtP – VC + (C) W = WtP – VC + (ER – IE) W Welfare WtP Willingness to Pay („Nutzen“) VC variable costs (C Net foreign currency refund ER Export Refund IE Import Expenditure) Surplus concept (indirect) W = CS + PS + St W welfare CS consumer’s surplus PS producer’s surplus St Budget effects or taxpayer’s effects Both concepts should give the same result!

Welfare effects of income increase
price  PS = b + c  CS = + a – b  W = + a c supply  WtP = +a+c+d+e -[ VC = +d+e ]  W = +a+c b D1 D0 quantity

Welfare effects of technological progress
 CS = +a+b+c  PS = –a d+e  W = +b+c+d+e price S0 S1  WtP = +c +e+f -[ VC = –b –d +f ]  W =+b+c+d+e D f quantity

The deadweight loss of taxation
- production tax as amount of tax per production unit- Producer i Market quantity price t MCiSi=2q QSi QSi,new MCi newSi new =2q+t S0 S1 D QS,D QS,Dmew P0 PD PS a b c d ΔCS=-a-b ΔPS=-c-d ΔSt=a+c ΔW=-b-d P0

Figure 1The Equilibrium without International Trade
Price of Steel Domestic demand Consumer surplus Domestic supply Equilibrium price quantity Producer surplus Quantity of Steel Copyright © South-Western

The Equilibrium without international trade
Equilibrium Without Trade Results: Domestic price adjusts to balance demand and supply. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive.

The determinants of trade
Equilibrium Without Trade Assume: A country is isolated from rest of the world and produces steel. The market for steel consists of the buyers and sellers in the country. No one in the country is allowed to import or export steel.

Determinants of trade What determines whether a country imports or exports a good? Who gains and who loses from free trade among countries? What are the arguments that people use to advocate trade restrictions?

The World Price and Comparative Advantage
If the country decides to engage in international trade, will it be an importer or exporter?

The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The world price refers to the price that prevails in the world market for that good.

If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good.

If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.

Figure 2 International Trade in an Exporting Country
Price of Steel Domestic demand Domestic supply Price after trade World price Domestic quantity demanded Domestic quantity supplied Price before trade Exports Quantity of Steel Copyright © South-Western

Figure 3 How Free Trade Affects Welfare in an Exporting Country
Price of Steel Domestic demand Domestic supply Price after trade World price Exports D C B A Price before trade Quantity of Steel Copyright © South-Western

Figure 3 How Free Trade Affects Welfare in an Exporting Country
Price of Steel Domestic demand Consumer surplus before trade Domestic supply Price after trade World price Exports D C B A Price before trade Producer surplus before trade Quantity of Steel Copyright © South-Western

How Free Trade affects welfare in an exporting country

The winners and losers from trade
The analysis of an exporting country yields two conclusions: Domestic producers of the good are better off, and domestic consumers of the good are worse off. Trade raises the economic well-being of the nation as a whole.

The gains and losses of an importing country
International Trade in an Importing Country If the world price of steel is lower than the domestic price, the country will be an importer of steel when trade is permitted. Domestic consumers will want to buy steel at the lower world price. Domestic producers of steel will have to lower their output because the domestic price moves to the world price.

Figure 4 International Trade in an Importing Country
Price of Steel Domestic demand Domestic supply Price before trade Price after trade World price Domestic quantity supplied Domestic quantity demanded Imports Quantity of Steel Copyright © South-Western

Figure 5 How Free Trade Affects Welfare in an Importing Country
Price Domestic demand of Steel Domestic supply C B D A Price before trade Price after trade World price Imports Quantity of Steel Copyright © South-Western

Price A Domestic demand of Steel Consumer surplus before trade Domestic supply Price before trade C B Producer surplus before trade Price after trade World price Quantity of Steel Copyright © South-Western

Price Domestic demand of Steel Consumer surplus after trade Domestic supply C B D A Price before trade Price after trade World price Imports Producer surplus after trade Quantity of Steel Copyright © South-Western

How Free Trade affects welfare in an importing country

How Free Trade Affects Welfare in an Importing Country The analysis of an importing country yields two conclusions: Domestic producers of the good are worse off, and domestic consumers of the good are better off. Trade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers.

The gains of the winners exceed the losses of the losers. The net change in total surplus is positive.

The effects of a tariff A tariff is a tax on goods produced abroad and sold domestically. Tariffs raise the price of imported goods above the world price by the amount of the tariff.

The effects of an import tariff (small country)
pi a c pw b d D q qwA qiA qiN qwN qiM qwM

 PS = + a  CS = – a – b – c – d  St = + c  W = – b – d pi a c pw b d D q qwA qiA qiN qwN qiM qwM

The effects of an export subsidy (small country)
pi pw a b c d D q qiD qwD qwS qiS qwX qiX

pi  PS = + a + b + c  CS = – a – b  St = - [b + c + d ]  W = – b – d pw a b c d D q qiD qwD qwS qiS qwX qiX

decrease of Willingness to Pay S pi increase of variable costs pw D q qiD qwD qwS qiS

decrease of Willingness to Pay S pi increase of variable costs pw increase of export refund D q qiD qwD qwS qiS

What happens if a country is a big one and applies a foreign trade policy?
Change of domestic price level due to import tariff and/or export subsidy Change of imported/exported quantities (i.e. lower quantity is imported and more is exported Increase of supply in the world markets Decrease of world market prices!

Why does the higher export supply decrease the world market price?
EA=Export Supply = (Exportangebot) IN=Import Demand =(Importnachfrage) Quantity

Welfare Effects of the guaranteed Price (Big exporting country)
Assumption: The higher export supply leads to the decrease of the world market price from Pw to P`w ΔCS = -b-c ΔPS = b+c+d ΔST = -(c+d+e+g+h+i) ΔW = -c-e-g-h-i Allocation TOT Losses Losses Quantity

Summary There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Economists, however, believe that free trade is usually the better policy.

References used, suggested reading
Henrichsmeyer, W. and H. P. Witzke (1994). Agrarpolitik Band 2, Bewertung und Willensbildung. Stuttgart: Eugen Ulmer Verlag Just, R. E., Hueth, D. L. and A. Schmitz (2004). The Welfare Economics of Public Policy, A Practical Approach to Project and Policy Evaluation. Edward Elgar Publishing. Mankiw, N. G. (2004). Principles of Economics, 3rd Edition. Thomson South-Western.

Part II

Cost – Benefit Analysis
Outline Recap - Welfare measurement in an open economy External effects a) negative externalities b) positive externalities Market power and rent seeking: monopoly Second best theory: a) monopoly and negative ext. effects b) price support and unemployment Welfare measurement of multiple price changes Empirical examples of cost-benefit Analysis

Welfare measurement of a single consumer
price Consumer surplus (CS) Consumer expenditure (CE) p* CS = WtP – CE D quantity q*

price S producer’s surplus (PS) Variable Costs (VC) p* PS = PR – VC quantity q*

Welfare measurement of single producers & consumers
price S consumer’s surplus producer’s surplus p* D quantity q*

Social Welfare Willingness to Pay concept (direct) W = WtP – VC + (C) W = WtP – VC + (ER – IE) W Welfare WtP Willingness to Pay VC variable costs C Net foreign currency refund ER Export Refund IE Import Expenditure) Surplus concept (indirect) W = CS + PS + St W welfare CS consumer’s surplus PS producer’s surplus St Budget effects or taxpayer’s effects Both concepts should give the same result!

Calculation of CS and PS
Exercise Calculation of CS and PS Given a demand function: XD = 12 - p and a supply function: XS = 2 p 1. find p* and x * used in the demand or supply functions 2. calculate the consumer surplus (CS) 3. calculate the produce surplus (PS) and the total welfare

Exercise Answer CS = 0.5(pp - p *) x * CS = 0.5(12 - 4)8 = 32
PS = 0.5 (p * - pS) x * PS = 0.5 (3 - 0) 8 = 16 Total Welfare = CS+PS Total Welfare = 32+16= 48

The deadweight loss of taxation
- production tax as amount of tax per production unit- Producer i Market quantity price t MCiSi=2q QSi QSi,new MCi newSi new =2q+t S0 S1 D QS,D QS,Dmew P0 PD PS a b c d ΔCS=-a-b ΔPS=-c-d ΔSt=a+c ΔW=-b-d P0

 PS = + a  CS = – a – b – c – d  St = + c  W = – b – d pi a c pw b d D q qwA qiA qiN qwN qiM qwM

Welfare Effects of the guaranteed Price (Big importing country)
Assumption: The lower import demand leads to the decrease of the world market price from Pw to P`w Price ΔCS = -a-b-c-d ΔPS = a ΔST = c+e ΔW = -b-d+e Allocation TOT Losses Losses Q

Welfare Effects of the guaranteed Price (Big exporting country)
Assumption: The higher export supply leads to the decrease of the world market price from Pw to P`w ΔCS = -b-c ΔPS = b+c+d ΔST = -(c+d+e+g+h+i) ΔW = -c-e-g-h-i Allocation TOT Losses Losses Quantity

Externalities An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander (Mankiw, 2004) Case when an action of an economic agent affects the utility or production possibilities of another in a way that is not reflected in the market place (Just et al., 2004)

Externalities Appear when there is influence of the economic activities of producer or consumers (economic units) over other economic units, they cause advantages or disadvantages without being evaluated Externalities cause markets to be inefficient, and thus fail to maximize total surplus Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable.

Negative external effects
 How can I show in this diagram the social effects? price SMC private With the help of the damage function! D quantity

Damage function = Relationship between production quantities and negative external effects External effect in monetary units Negative external effect (NEE) = ¼ q2 quantity Marginal External Effect (MEE) =

Negative external effects (without trade)
price S*MC social=MC private + MEE SMC private MEE (marginal external effect) D qsocial qprivate quantity

Negative external effects (without trade)
Reference system: qsocial price S* ΔVCsocial = ΔVCprivate + ΔVCext = c + d + d = c + d + a + b SMC private psocial the social cost exist but nobody takes them into account a pprivate b MEE c d D qsocial qprivate quantity

Internalising an externality
Altering incentives so that people take into account the externality and act analogous

The Types of Private Solutions
Moral norms and social sanctions Voluntary organizations (foundations and associations) Contracts between parties

Coase Theorem: The private economic actors can solve the problem of externalities among themselves. Whatever initial distribution of rights, the interested parties can always reach a bargain in which everyone is better off and the outcome is efficient.

Why private solutions do not always work?
Transaction costs Breakdown of agreements Coordination problem of the large number of interested parties

Achieving the Socially Optimal Output The government can remedy an externality by Regulation, i.e. making certain behaviours either required or forbidden or by using market based policies like imposing a tax (or a subsidy) on the producer to reduce (or increase) the equilibrium quantity to the socially desirable quantity. Example Pigovian Taxes

Pigovian taxes S* MC social price ΔCS = -a-b-c ΔPS = -e-f-g ΔST = a+b+e+f ΔEA1 = g+c+d ΔW = +d SMC private P1 d the social cost exist but nobody takes them into account If we move more towards left (ban of production) then the utility gets reduced, but again we have very low variable costs. Nevertheless in total the welfare losses are higher than the savings from lower costs. An extreme case would be that the marginal external cost so high that the marginal social cost cuts the demand curve in the ypsilon axis where the quantity is zero. In this case the welfare optimum is reached with a ban of production (like nuclear energy, nuclear weapons) a b c Po g e f P2 1 External Agents D qsocial qprivate quantity

Positive external effects (with trade)
Import tariff: price SMC private ΔU = -d-e -(ΔVCs) = -(+c) -(ΔIE) = -(-b-c-e) ΔW = +b-d S* First best policy producer subsidy! But there is a difference for the country’s budget because with an import tariff the country benefits from a revenue, while the subsidy is an expenditure, so what to do?? Maybe a country would prefer the option of the tariff and when this is the case it should see how to get the most out of it, thus set the tariff so high that areas b=d and this would be a second-best policy by-product distortion Pi Producer subsidy: a d ΔU = 0 -(ΔVCs) = -(+c) -(ΔIE) = -(-b-c) ΔW = +b Pw b e c D quantity qS,p qS,s qD,2 qD,1

Monopoly D price Pcomp. qcomp. quantity
The producers make a cartel (an association) and form a monopoly. No change in the technology thus no change in the marginal cost D qcomp. quantity

D selling price function
Monopoly price Pmon Pcomp. Thus to find the quantity the monopolist will produce we need the marginal revenue curve of the monopolist and with the help of the demand function we find the selling price that applies under the monopoly WHY is it so??? D selling price function qmon. qcomp. quantity MRmonopoly

Figure 2 Demand Curves for Competitive and Monopoly Firms
(a) A Competitive Firm ’ s Demand Curve (b) A Monopolist ’ s Demand Curve Price Price Demand A competitive firm is a price taker and takes the price that is formed in the market A monopoly is a price maker and can alter the price by changing the quantity. From observations he faces a downward slopping demand curve. The monopolist wants to maximise ist profit, in order to do that he will have to produce this quantity so that MR=MC, but MR is always less than the price of its good (in contrast to the competitive firm!) Demand Quantity of Output Quantity of Output Copyright © South-Western

Figure 3 Demand and Marginal-Revenue Curves for a Monopoly
Price $11 10 9 8 7 6 5 4 3 Demand (average revenue) 2 Marginal revenue 1 –1 1 2 3 4 5 6 7 8 Quantity of Water –2 –3 –4 Copyright © South-Western

Figure 4 Profit Maximization for a Monopoly
Costs and and then the demand curve shows the price consistent with this quantity. Revenue 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity . . . Marginal revenue Demand Monopoly price QMAX B Marginal cost Average total cost A Q Q Quantity Copyright © South-Western

Figure 5 The Monopolist’s Profit
Costs and Revenue Marginal revenue Demand Marginal cost Monopoly price QMAX B C E D Monopoly profit Average total cost Average total cost Quantity Copyright © South-Western

D selling price function
Monopoly price Pmon a b ΔCS = -a-b ΔPS = +a-c Δbudget= 0 ΔW = -b-c Pcomp. Reference system polypoly These are the social costs of forming a monopoly. Nevertheless we show that the monopoly rent is area a, meaning that for the monopolist it worths operating so that a>c , or else it makes no sense for him Rent seeking: seeking for distributions-profits, but that entails costs, like corrupting politicians so as to get the wished legislation etc.(!) These rent-seeking costs should no way exceed the area a or else the monopolist has no rent, and thus no benefit from being a monopolist!!! c D selling price function qmon. qcomp. quantity MRmonopoly

Monopoly and negative external effects D selling price function
Ssocial Sprivate Pmon - - Pcomp. In case though we have negative external effects, if we do not take them into account we will have losses of triangle XXX but if a monopoly exists in the market then the welfare loses would be only as high as the triangle XX which is smaller, meaning that the welfare losses are lower and thus there is a gain for the society! D selling price function qmon. qs qcomp. quantity MRmonopoly

Monopoly and negative external effects D selling price function
Ssocial Sprivate Pmon Pcomp. In case though we have negative external effects, as shown in this graphic then, D selling price function qmon. qs qcomp. quantity MRmonopoly

Price support and unemployment
Sprivate Pi - - Pw quantity

Price support and unemployment
Sprivate ΔU = -b-e -(ΔVC) = -(+g) ΔER = e+f+g -(ΔIE) = 0 ΔW = -b+f Ssocial When there is unemployment and assuming that the opportunity costs of labour are zero, then the extra resources (labour)that are required so as to produce more can come from the unemployed and in this case it is as if we are in the case of a internalising a positive externality! Pi a b c d Pw f e g quantity

Welfare measurement of multiple price changes
Input (factor) market Output market wage price S(W0) a So far what we have done is to measure welfare in the output market. But there are cases that changes occur but we cannot measure them because of lack of data, but it can be that we have enough data to measure the derived demand in an intermediate market. For example it can be possible to estimate the demand for iron at the industry level but not the marginal cost curve for steel production for an individual firm. In such a case it would be great if we could measure the welfare effects in the input market and this exciting thing is what we are going to do now! A profit maximising firm would have to consider how to get the highest profit, so when deciding how many workers to employ should consider how much profit each worker will bring in. Marginal profit of an additional worker is the worker’s contribution to the revenue minus his wage and this is the value of the marginal product. Producer surplus in the input market: = total revenue – variable cost Total revenue is the product of labour and is thus the area between the axes and the value of marginal product curve The variable cost is the wage multiplied with the hours of labour (i.e. unit to measure the quantity of labour) At first assume that W0 Value of marginal product (demand curve for labor) L0 hrs of labour quantity PS = total revenue – variable cost = value of product – wage = a

a) Factor price changes (falls), by constant output prices Input (factor) market Output market wage price S(W0) a _ What have I achieved with that? Well usually it is very difficult to obtain data and define the functions and it is assumed that the behaviour of the actors is like in middle areas, the exteme areas is very difficult to define , meaning that areas y and x cannot be measure. Moreover the deviations in the costs of a firm in the reality are influenced by more variables than the price of the output and the quantity Therefore it is easier to measure the welfare where the prices change but not where the curves shift! W0 S(W1) P0 z b y c x W1 d D quantity L0 hrs of labour L1 q0 q1 ΔPS = b+c = z

b) Output price changes (increases), by constant input prices Input (factor) market Output market price wage S(W0) P1 _ b a Here simpler is the welfare measurement in the output market! W0 P0 D (P1) D (P0) quantity L0 hrs of labour L1 q0 q1 ΔPS = a = b

c) Simultaneous changes of input & output prices, 1 variable factor Input (factor) market Output market price wage S(W0) P1 x a v b W0 S(W1) P0 z y D (P1) c d W1 D (P0) hrs of labour quantity L0 L1 ΔPS = x+y+z ΔPS = a+b+d

- Sequential measurement of welfare - a) b) P0 → P1, W0 conts. W0 → W1, P0 conts. W0 → W1, P1 conts. P0 → P1, W1 conts. ΔPS(output) = +a ΔPS(input) = +y+z ΔPS = a+y+z ΔPS(input) = +y ΔPS(output) = +a+b ΔPS = a+b+y ΔPS = x+y+z = a+b+d = a+y+z = a+b+y  b=z a=x d=y

Empirical Measurement of Economic Policies
Numeric equilibrium models have been developed to evaluate ex ante effects of economic policies: Policy Impact Studies General Equlibrium Models explain the whole economies, whereas the Partial Equlibrium Models are usefull for more elaborate sectoral analysis Comparative static-Dynamic One product-multi product One region-multi region Homogenous goods-heterogenous goods Here simpler is the welfare measurement in the output market!

Computable General Equilibrium (CGE)
The General Equilibrium models consist of a system of equations, which cover all the money and goods flows in an economy For the calculation of General Equilibrium Models variables must be determined eather as the model-endogenous or exogenous By recursive iteration all markets are simultaneously being brought into the equilibrium.Therefore, wages, prices, investment and growth, state budget, export and import volumes, interest rates and other variables can be determined. Here simpler is the welfare measurement in the output market!

Social accounting Matrix SAM
A SAM is a square matrix in which each transaction is recorded only once in a cell of its own – it is conventionally agreed that the entries made in rows represent incomes or receipts, whilst the entries made in columns represent outlays or expenditures - so, for each row there is a corresponding column, i.e. for every income there exists a corresponding expenditure, with their totals being equal. Here simpler is the welfare measurement in the output market!

Thank you for your attention!
Here simpler is the welfare measurement in the output market!

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