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e&e No 22

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Macroeconomic Module

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The Simplified Macroeconomic e&e Model Project - Application to the Next Two Decades

1 - Concept

In the book "Brasil: O Crescimento Possível" - Bertand do Brasil 1996 - Carlos Feu Alvim et al studied the limitations to the Brazilian economic growth adopting a methodology analogous to that used in the present module. The program presented here simplifies some steps and renders automatic the incorporation of new years to the historical database.

The model of the book uses as anchor the historical behavior of some macroeconomic variables that presented a marked inertia in the past. On the other hand, it focuses the "real economy" ignoring, as a first approximation, financial factors such as inflation, interests and cash flow. The analysis is concentrated on the accumulation of capital goods, physical production and transfer of non-financial goods and services as expressed in the National Accounts.

In order to express these values in a common unit, it is used money corrected by the GNP's deflator. Financial limitations, accumulated debt and interest rates are introduced as a consequence of real economical changes (foreign transfer) and as a parameter to establish the limits to get into debt, which might restrict or determine the flow of resources.

2 - Macroeconomic Module

The e&e team (NGO or review http://ecen.com), in many cases in cooperation with the consultant Eduardo Marques, has been developing some integrated planning work that uses as a starting point a macroeconomic module. This macroeconomic projection module is a dynamic adaptation of the model presented in the book.

This module maintains in its approach the idea of "anchoring" our projections in historical behavior using on the average a period of about 50 years for the economic projections (whenever possible based on IBGE's National Accounts or coherent with them).

Energy projections have been "anchored" in data from the National Energy Balance - BEM, edited by the Ministry of Mines and Energy, for about 30 years.

There is the possibility of expanding its historical database by endogenously adjusting the behavior functions according to new historical values or by revising the existing ones. It was also introduced the option of modifying historical trends due to changes in economic policy or projected technologies. However, the transition always takes into account the historical inertia of the previous behavior.

The model became less deterministic than that of the book, due to the possibility of adapting itself to new policies.

On the other hand, it makes clear that modification of the historical trend is only possible if you pay the price of installing a global policy that is coherent with the proposed goal. On the other hand, being fixed on the historical data creates difficulties in formulating hypothesis that are rather incoherent with past behavior. Whenever possible, we have used comparisons with other countries in order to orient our choice.

We present here a "revision run" that might be a reference value for other "runs".

3 - Model Presentation

The model is available in Visual Basic for Excel (Microsoft) language that permits using its results in a easy way to other applications.

Its initial presentation depends on the specific application and is similar to that presented below (Figure 1). Eventually other figures in this chapter will show other options that refer to other applications that use the same macroeconomic module.


Figure 1: Program presentation "cover"

PROJECT - ENERGY

The stock of capital goods is calculated from the historical investments (in GNP percent value for the year converted to the GNP of 1980 by the implicit GNP deflator), and scraping is corrected by the logistic lasting function, using different average lives for investments in civil construction and machines and equipment (plus others). Scraping considers investment in each year and the time interval up to the year in which capital stock is calculated. These graphics, as others that are available, can be seen as indicated in Figure 2.


Figure 2: Choice of graphic exhibition

Choice: Graphics/Macroeconomic/ Goods' Scrapinging Function

The result is exhibition of the lasting function graphic shown in Figure 3.


Figure 3: Screen corresponding to scraping curves for civil construction goods and for machines and equipment (includes others).

Construction - Machines & Equipment

The program allows for visualizing the results by means of graphics such as that shown above as well as specific numerical spreadsheets:


Figure 4: Visualization of numerical results from the menu.

Choice: Result\|Macroeconomic\ Synthesis Values

The other menu items present references to actions foreseen in EXCEL or specific actions of the program. Other options besides those related to the macroeconomic module may be present.


Figure 5: Example of using the program menu. Actions corresponding to the macroeconomic module are open and a few EXCEL actions were included.

Choice: Actions\Macroeconomic Model\ Recalculate Capital Stock

In Figure 5 different program actions are indicated. There are some general actions in this menu item. The first action in the list corresponds to "Enter Data" ("ENTRAR DADOS") as a calculation parameter of one scenario and must be executed in order to load data that eventually are not in the memory due to the order in which the windows were opened. Therefore, when it is opened the program follows a route similar to that of selecting all windows in a predetermined order, redoing all calculations and updating the values according to the existing program links. Due to this characteristic, this action should be chosen always when there is doubt about data updating. Most of the other actions correspond to calculations that can be performed from historical parameters or from those of the program. In a general way these actions are self-explanatory.

4 - Inserting or Altering Scenarios

The program allows for different scenarios that can be coupled to other programs such as regional projections or energy demand. In order to save space in the computer disk and to facilitate economic scenario substitution in other applications only fundamental data of these scenarios are kept. It should be emphasized that these data are sufficient to run a scenario again and to obtain all results: graphics and tables.

In the same way the historical data are grouped in a single spreadsheet that permits easy updating. These spreadsheets can be used to insert or update historical data that will be taken into account through the "Enter Data" ("ENTRAR DADOS") action in any of the considered scenarios.

The revision of the scenarios or of the historical data is performed through the menus by the actions indicated in the "Input" ("ENTRADA") item, see Figure 6.


Figure 6: Input of historical data or of data relative to scenarios through the menu.

Choice: Imput\Macroeconomic Data \Existing Scenario

In what concerns the scenarios the program allows for three actions: introduction of a new scenario, revision of the one presently used or revision of an existing scenario. One can also go to a new configuration starting from an existing scenario as will be shown in the following example. Indicating an existing scenario we would have:

 


Figure 7: The red cell indicates the variable to be changed and the boldface column indicates the input data corresponding to the present scenario. In the box indicated by the title "Economic Scenario" (CENÁRIO ECONÔMICO) one can chose one of the existing scenarios by means of the scroll bar (indicating a non-completed scenario may result in errors). Input data of the available scenarios are kept in this spreadsheet (observe the column adjacent to that in boldface).

Data correspondig scenario: 1 Economic scenario 2 inertial 3 Economic 4 Last year known 5 Maximum Territorial Saving
6 K/Y limit 7 Commercial Balance

For example, to chose the "inertial" scenario one must chose it in the "choice box" indicated by "Economic Scenario" ("CENARIO ECONÔMICO"). Then the program will alter all input data according to the chosen scenario.

5 - Territorial Saving Projection

If we chose the action "Revision Present"("REVER ATUAL"), see Figure 7, we will revision the present scenario that can be transformed into a new one at the end of the process. We will show below the evolution in a practical example:

Ass mentioned above, when we click "Revision Present" ("REVER ATUAL") the program goes to the first screen concerned with the process of scenario construction, that corresponds to the Territorial Saving variable.

It should be noticed that most of the screens in the program allow for returning to the previous screen or to go to the next one by clicking the corresponding button. Normally, "Return" ("RETORNAR") does nor modify the previous action and "Next Data" ("PRÓXIMO DADO") introduces new information into the scenario and goes to the screen corresponding to the next step in the procedure. The title in red signals the parameter that is supposed to be updated. In the present case, differently from what happens in the general case, when we select "Return" ("RETORNAR") the program goes to the chosen screen corresponding to the last year when data is known and whose spreadsheet is normally retrieved only when it is necessary to change the referred year.

The variable in question, see Figure 8, is the Territorial Saving (P) which is the fraction of the annual GNP that is not consumed. This "part with consumption" was a relatively "well behaved" variable in the past as can be verified in the figure below and the strong oscillation at the end of the nineties can be attributed to variations in the relative prices. The territorial saving rate is determined in the investment projection, as it will be shown in what follows. As we have already mentioned, representation of the past aims at orienting the choice of its future evolution.


Figure 8: First screen for introduction of data, in which the main variable to be altered refers to the territorial saving behavior. It is also possible to alter the name of the scenario, the last known year and the current year.

Graphic: Maximum Territorial Saving - Territorial Saving Current Prices - Adjustment - Projection - 1980 Prices

The territorial saving value was increasing in the last decades and indicated a positive factor for economic growth. Apparently, the Real Plan had a strong influence in this parameter and did not stimulate internal saving and was an incentive to consumption. Part of the improvement in life conditions verified in that period was due to this saving reduction in benefice to consumption. As will be seen, the ingress of external resources did not compensate this decrease of internal saving necessary for creating investment.

In the report used 1998 was considered as the last year whose data is known. As long as there are estimates, even though partial data relative to 1999, it may convenient to use them as a basis for the projection. This is done by the commands "Change Last Year"("MUDAR ÚLTIMO ANO") and "Input"("ENTRADA") Þ "Review Historical Data"("REVER DADOS HISTÓRICOS"), see Figure 6 for the last command.

One can also change "present year" and the result is alteration of the intermediary years as will be indicated in what follows. This procedure is adopted in some projections for the Electric Sector and is also adopted in this version of the program. This flexibility concerning the reference years allows for introducing new years in the historical series when they are available.

In the projection it was supposed that the territorial saving would tend to a constant fraction of the GNP. This limit value was used to fit a logistic curve. The "inertial" scenario supposes saturation in 21% of the GNP, which represents the best fit for the past data. Even though this is 3% higher than the values for 1996 and 1997 this results in a growth lower than 2% in the GNP for the two next decades. In our reference scenario we have considered that the territorial saving would resume the growth behavior it had before the Real Plan and would tend to a value of 27% of the GNP. This change is made by altering the limit value, in the box indicated by the title in red in Figure 8. The new result is shown in Figure 9.


Figure 9: The option for a limit of 27% of the GNP for the territorial saving leads to territorial saving values coherent with those verified in the years before the Real Plan and generates a larger economic growth. It should be emphasized that this alteration in the series behavior will only be possible if the economic policy is re-oriented.

Enter value - Click OK

As can be seen in Figure 9 the territorial saving variation implies resuming the disposition of exchanging consumption with real investment (in fixed capital goods). In order to "match" the fit with historical data a Poisson function was used and its parameter can be altered so that it will smooth the transition between the last historical data and the projection, with different time delays.

6 - Projection of the Capital/Product Ratio


Figure 10: Introduction of the Capital/Product ratio: the maximum value is introduced in the indicated cell and by clicking "OK" one can see the fit and the projection whose transition from the last data is made through a Poisson curve.

Max K/Y value (enter) - OK to verify graphic - Capital/ Product Ratio - Fit

In the present case a change is made from the limit value 3 (shown in the graphic) to 2.7 (capital productivity graphic shown in the figure that follows).

The Capital/Product ratio can be considered as the inverted global productivity function.

That is, as can be observed in Figure 11, capital productivity has been decreasing in the last decades. A capital/productivity ratio of 3 signifies that it is necessary a capital goods stock of 3 thousand dollars for each thousand dollars of product. In the reference scenario we have supposed that capital productivity would tend to 37% (capital/product ratio = 2.7) which is very close to what has been verified in the last years.


Figure 11: Capital Productivity Y/K Graphic, for a maximum K/Y ratio of 2.7 that corresponds to the minimum productivity of 3.7. In 30 years the average productivity of Brazilian capital practically dropped to half of its 1960 value.

Capital Productivity -Accumulated Product/Capital - Fit -Projection - Scenario - Reference 1

The drop in the capital productivity, as already mentioned in several e&e articles and other media, is identified as one of the biggest problem for resuming growth. This is not an isolated phenomenon and occurs in several developed and developing countries as has been demonstrated in a recent study by Aumara Feu, to be published soon (part of a Ph. D thesis at the Brasilia University).

7 - Foreign Trade

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