Effects of the Increase in the Global Price of Agricultural Products on Iran's Economy Using the GTAP Model

Document Type : Research Article

Authors

• Parviz Rostamzadeh
• Marzieh Rassaf

Department of Economics, Shiraz University, Shiraz, Iran

https://doi.org/10.22067/jead.2023.82713.1197

Abstract

Introduction
Food security is one of the most important issues in the world. The corona epidemic, Russia's attack on Ukraine, drought and many other factors have led to an increase in food prices. The sharp increase in global prices of basic food is considered a serious threat to global development, which leads to a significant increase in poverty, a decrease in the level of nutrition, and limited access to services such as education and health. The increase in the price of food in the world markets will also affect the domestic markets of the countries, especially for the countries that are large importers of food and have experienced heavy inflation in their countries. Iran is one of the countries that import food in the world, so higher global food price will undoubtedly affect various economic sectors of Iran. Considering the negative economic and social effects of the unbridled increase in food prices, the impact of global food prices on domestic prices has been the focus of recent studies.
 
Materials and Methods
Computable General Equilibrium (CGE) model is a system of equations that explains an economy in its general form and the interaction between its components. One of the types of general equilibrium models is the GTAP model. This model is specific to global trade analysis and is multi-regional. This model is static (one-period) and includes several economic regions, several economic sectors, and a fixed amount of several production factors. The simulations will be done using the Run-GTAP software. This database has 129 districts and 57 economic sectors. In this study, two areas are considered; which includes Iran (IR) and the rest of the world (ROW). In the database software, all goods and economic sectors are grouped in 57 categories, which can be grouped in a maximum of ten categories or less. Here are four economic sectors: agriculture, industry and mining, oil and services, and three factors of production including labor, capital and land are considered.
 
Results and Discussion
In this study, the political experience of a 30 percent increase in the global price of agricultural goods will be examined. With a 30% increase in the global prices of agricultural products, the amount of demand reduction in the agricultural sector as a percentage of changes is equal to -1.37. As a result of the political shock the per capita utility of the private sector household has decreased by 1.32% and the per capita utility of the public sector has decreased by 2.14%. Also, the decrease in equivalent change as a welfare index is equal to -3349.05 million dollars. In a static model, the factors of population, technology and investment are assumed to be constant, so the amount of their change is zero, but in dynamic models, the positive or negative effects of these three factors can also be observed. Here (30% price shock on agricultural goods) efficient allocation is the most important factor affecting welfare (negatively).
 
Conclusion
Iran is one of the importing countries in the past years in terms of grain demanding, and due to successive droughts and failure to observe a serious cultivation pattern in this area, it has faced the weakness of supplying part of its food needs. This forced Iran to import grains and food from other countries in the world, especially Russia. According to the increase in the food price index in the world, the possible effects of the increase in the global food price (30% shock) for Iran have been estimated using a global general equilibrium model. The results show that if the price of agricultural products in the world increases by 30%, the consumer price in Iran will increase in the agricultural sector and decrease in other sectors. Also, the amount of consumer goods will decrease in all sectors, while the amount of consumption of domestic goods will increase, except for the service sector, and the amount of consumption of imported goods will decrease in all sectors, especially the agricultural sector. In addition, the results show that the amount of production in the agricultural and oil sectors increases and has decreased in other sectors. Based on the EV welfare criterion, the welfare level of the private household decreases and the results of the welfare analysis show that the most important factor influencing the welfare is the effects of resource allocation (efficiency).

Keywords

• Computable general equilibrium model for world trade
• EV welfare measure
• World price of agricultural products

Main Subjects

• Agricultural Economics

©2023 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source.

References

1. Arndt, C., Diao, X., Dorosh, P., Pauw, K., & Thurlow, J. (2023). The Ukraine war and rising commodity prices: Implications for developing countries. Global Food Security, 36, 100680. https://doi.org/10.1016/j.gfs.2023.100680
2. Bilali, H., Mehrgan, N., & Bajlan, A. (2020). The effect of the price of energy carriers on food prices: an autoregressive approach with distribution breaks. Journal of Agricultural Economics Research, 12(4), 171-188. (In Persian)
3. Burfisher, M.E. (2011). Introduction to Computable General Equilibrium Models: Cambridge University Press.
4. Furceri, D., Loungani, P., Simon, J., & Wachter, S.M. (2016). Global food prices and domestic inflation: some cross-country evidence. Oxford Economic Papers, 68(3), 665-687. https://doi.org/10.1093/oep/gpw016
5. Huff, K., & Hertel, T. (2000). Decomposing welfare changes in GTAP Model; GTAP Technical Paper No. 5, GTAP Center.
6. Ivanic, M., & Martin, W. (2008). Implications of higher global food prices for poverty in low-income countries. Agricultural Economics, 39, 405–416. https://doi.org/10.1111/j.1574-0862.2008.00347.x
7. Jafari Samimi, A., & Farajzadeh, Z. (2017). Investigating factors affecting the food price index in Iran. Agricultural Economics Research, 11(1), 1-16. (In Persian)
8. Jalil, M., & Zea, E.T. (2011). Pass-through of international food prices to domestic inflation during and after the great Recession: evidence from a set of Latin American economies. Desarrollo y Sociedad Journal, 67, 135-179.
9. Javadan, A., Pish Bahar, A., Hakit, J., & Mohammadrezaee, R. (2015). Investigating the transfer of global food prices to domestic prices in Iran. Quarterly Journal of Applied Economic Theories, 4, 177-196. (In Persian)
10. Javadan, A., Rahli, H., & Naqdi, R. (2014). Investigating factors affecting food prices in Iran with an emphasis on oil shocks. Agricultural Economics Research, 7(2), 179-195. (In Persian)
11. Karakotsios, A., Katrakilidis, C., & Kroupis, N. (2021). The dynamic linkages between food prices and oil prices. Does asymmetry matter?. The Journal of Economic Asymmetries, 23, e00203.‏
12. Mahmoudi, A. (2014). Global Trade Analysis Project (GTAP) Applied General Equilibrium Model, Mahabad, first edition of Islamic Azad University Printing and Publishing Organization. (In Persian)
13. Nejati, M. (2011). Evaluating the effects of foreign direct investment on Iran's economy using a calculable general equilibrium model, Ph.D. thesis in the field of economics], Shiraz University. (In Persian)
14. Olayungbo, D.O. (2021). Global oil price and food prices in food importing and oil exporting developing countries: A panel ARDL analysis. Heliyon, 7(3), e06357.
15. Pal, D., & Mitra, S.K. (2017). Time-frequency contained co-movement of crude oil and world food prices: A wavelet-based analysis. Energy Economics, 62, 230-239.‏
16. Salem, A., Mohajeri, P., & Hamidi Farhani, A. (2020), Factors affecting the increase in food price index using the quantile regression approach, Financial and Economic Policy Quarterly, 9(35), 71-107. (In Persian)
17. Shabanzadeh, M., Mahmoudi, A., & Spongari Kanari, R. (2014). Investigating the effect of transferring global prices to domestic markets for specific products of Iran's agricultural sector. Quarterly Journal of Agricultural Economics and Development, 29(1), 55-67. (In Persian)
18. Sivarajasingham, S., & Balamurali, N. (2014). The pass-through of global food price inflation to domestic inflation: empirical evidence from Srilanka. International Research Sessions, Peradeniya University, Sri Lanka, Vol. 18, 4^th & 5^th July.