Implementation of Equilibrium-Price Model to the Estimation of Import Inflation

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Iteratioal Joural of Busiess ad Social Research Volume 05, Issue 04, 2015 Implemetatio of Equilibrium-Price Model to the Estimatio of Import Iflatio Yadulla Hasali 1, Jeyhu Abbasov 2, Murad Yusifov 3

1 Iteratioal Joural of Busiess ad Social Research Volume 05, Issue 04, 2015 Implemetatio of Equilibrium-Price Model to the Estimatio of Import Iflatio Yadulla Hasali 1, Jeyhu Abbasov 2, Murad Yusifov 3 ABSTRACT This study aims at ivestigatig the the import iflatioary processes as a result of feedbacks of mutual ecoomic relatios of World coutries It is used Equilibrium Price Model to estimate the import iflatioary processes i CIS coutries The study ivestigates the further results regardig the import iflatioary processes i the CIS coutries o the sceario of icreasig the Value Added orm i Russia As well as by stadpoit of ecoomic growth ad price stability, the recet revaluatio of US dollar i the World ad its impacts to total output of other coutries have bee ivestigated i details I other words due to revaluatio of the US dollar, if the fial product decreases i USA, this decreasig impact how to be trasmitted to the world coutries have bee estimated by the Iput- Output Table i this study as well The work is fulfilled o the Iput-Output data for the year 2011 This study assumes theoretical ad practical importace i defiig the moetary policy Keywords: Equilibrium-price model, gross output, gross value added, iput-output table Available Olie: 8 th April, 2015 MIR Cetre for Socio-Ecoomic Research, USA 10 INTRODUCTION The recet oil price shocks ad revaluatio of US dollar causes the iflatioary processes i the CIS coutries as a result of mutual relatios amog the coutries So, it makes the problem to be topic at preset time It is iterestig to kow the import iflatio sesitivity of the CIS coutries agaist the chage i macroecoomic idicator i Russia I the same time by stadpoit of ecoomical effects, the recet revaluatio of US dollar may cause the decrease i fial product of USA Ad additioally it is also iterestig to kow how the decrease i fial product of USA will impact the other world coutries icludig the CIS coutries Of course, the estimatio of this impact ad to kow how much it will result i losses of total output of other coutries is very iterestig for all by stadpoit of price stability ad ecoomic sustaiability 1 Professor, Head of Departmet of Modelig Social-Ecoomical Processes, Istitute of Cotrol Systems of Azerbaija Natioal Academy of Scieces, yadulla_hasali@yahoocom 2 PhD cadidate, ceyhuabbasov811031@mailru 3 PhD cadidate, Baku State Uiversity, faculty of Applied Mathematics ad Cyberetics, yusifovmy@gmailcom 1

2 Hasali, Abbasov, Yusifov, IJBSR (2015), 05(04): World ecoomy is ruig i systematic form i the framework of mutual ecoomic relatios of world coutries at preset Certaily, each atioal ecoomy wats to derive its beefits from these relatios So, it is`t merely relatios, it should be cosidered like the coutries` behavior i relatio to others oes too System elemets are beig chaged uder recurret ecoomic processes ad takig a ew shape Surely, these relatios ca be modelled through matrix Ecoomic crisis occured recet decades could be cosidered as the result of qualitative ad quatative chages i the world ecoomy All these chages is a appearace of mutual ecoomic relatios of the world coutries I this study, we try to estimate the import iflatioary processes of the CIS coutries by Equilibrium- Price model This model is a adjoit of Iput-Output model ad oe of the importat ecoomicmathematics methods applied i ivestigatig the iteridustry relatios of the ecoomic sectors The study ivolves the 70 world coutries, icludig Azerbaija I order to maitai the equilibrium amog the world coutries the remaiig coutries of the world were give uder the title of the rest world I the study we used some macroecoomic ad Natioal Accouts data such as itermediate cosumptio, itermediate products, gross domestic products, gross output, gross value added, fial demad This study is fulfilled o the data for the year 2011 I accordace with iteratioal mauals Iput-Output model are compiled after each five years The statistic data for complig the Iput-Output Table were obtaied from the official iteret site of the Uited Natios Orgaizatios(UNO) Note that, Iput-Output model is widely recomeded ad useful methods i studig the World ad atioal ecoomiesthe methodical essetials for implemetig to the world coutries relatios have bee prepared ad itroduced i the project titled as The World Iput Output Database (WIOD): Cotets, Sources ad Methods which fiaced by Europea Commisio (Commissio, 2012) The mai objective of this study is to defie a import iflatio emerged from mutual relatios amog the coutries, especially CIS coutries by Equilibrium-Price model Additioally, i this study we have ivestigated reciprocally ifluece of chages i ecoomic idicators of ay world coutries to the others oe by Iput-Output model 20 THEORETICAL DESIGN 201 THEORETICAL BASIS OF INPUT-OUTPUT(I-O) MODEL Iput-Output model was compiled first of all uder the title of iteridustry balace by Cetral Statistics Commitee of USSR i 1926 Compilatio of I-O was based o Ecoomic table of Frasua Kee ad Broad reproductio scheme Note that first iteridustry balace aalysis was established by Wassili Leotiev Due to this scietific work he was awarded with Nobel Prize i 1973 (Hasali ad Moghsoudi, 2011) The geeral shape of iteridustry balace table is depicted as follows Table 11: Iteridustry balace table Key idustry Iterediate cosumptio Total Fial Compoets Gross itermediat demad of output e Product (d) fial demad (X) 1 j N (IP) 1 x 11 x 1j x 1 d 1 X 1 I x i1 x ij x i d i X i N x 1 x j x d X 2

3 Implemetatio of equilibrium-price model Total itermediate cosumptio (GIC) AI 1 AI j AI d X Gross Value Added VA 1 VA j VA VA (GVA) Net taxes (NT) NT 1 NT j NT NT Gross Domestic GDP 1 GDP j GDP GDP Product (GDP) Gross Output (X) X 1 X j X X I order to elucidate the I-O model it is importat to poit some required equatios by stadpoit of methodical aspects All equatios poited below are ivolvig mai elemets of Natioal Accouts ad hece i geerally these equatios are carrig the table elemets ito the equlibrium coditio (Hasali ad Abbasov, 2014) First sectio of I-O model refers to itermediate cosumptio movemets, secod sectio to the compoets of fial demad ad third sectio to the compoet of Value Added (Yadulla Hasali, 2011) The followig equatios are valid for each row of the table (Brow ad Giarratai, 1979) X i = (x i1 + x i2 + + x i ) + d i (21) The followig equatios are valid for each colum of the table, X j = (x 1j + x 2j + + x j ) + V j (22) If we sum equatio (11) for j ad equatio (22) for i, the we ca get the below metioed: i=1 X i = j=1 i=1 x ij + i=1 d i (23) From the latter expressios, sice j=1 X j = i=1 j=1 x ij + j=1 V j (24) i=1 X i = j=1 X j The we ca get the followig equatio d i = V j i=1 Gross value added ad total fial demad arisig from mutual relatios of world coutries equals each others If cosider the equatio a ij = x ij i equatio (11) the we get X j j=1 X i = i=1 a ij x i + d i (25) It is kow that this is simultaeous equatios ad these equatios systems could be writte as matrix form So, equatio (25) could be expressed as follows Or X 1 X 2 a 11, a 12,, a 1 a 21, a 22,, a 2 X 1 X 2 d 1 d 2 = + ( X ) ( a 1, a 2,, a ) ( X ) X = AX + D ( d ) (26) The above metioed equatios coveys the same meaig Havig made some coversio we ca modify this equatio to the followig oe (Leotief, 1979) 3

4 Hasali, Abbasov, Yusifov, IJBSR (2015), 05(04): X = (I A) 1 D (27) Let`s state Natioal Accouts idicators i equatios forms which used i this model Gross output is the value of goods ad services produced by etities withi oe poit of time (Gorkhmaz Imaov, 2001) I Productio accout equilibrium equatio (Gorkhmaz Imaov, 2001) GO = IC + GVA (28) Here, GO-gross output, IC- itermediate cosumptio, GVA- meas gross value added II Goods ad services accout equilibrium equatio (Gorkhmaz Imaov, 2001) GDP = GO IC + T S = C(C + G) + S(I) + NEX (29) S- Here, GO-gross output, IC- itermediate cosumptio, GDP-gross domestic product, T-taxes, subsidity, C-cosumptio, S-savig, NEX-et export 202 THEORETICAL ESSENTIALS OF EQUILIBRIUM-PRICE MODEL Equilibrium-Price model is adjoit of Iput-Output model Oe of the mai directios of iteridustry aalysis is to establish the equilibrium-price model This model determies the relatios amog the total output of the idustries, itermediate cosumptio ad gross value added o the colums of iputoutput table So, i mathematically form total output of each idustry o respective idustry colum of the table is equal to the sum of itermediate cosumptio ad value added amout Mathematical expressio of this equatio is as follows: X j = (x 1j + x 2j + + x j ) + V j (210) I accordace with I-O table the goods produced i ay X j idustry are sold at certai P j price ad hece cause the formatio of total output of the same idustry Note that, i order to produce for uit product i each idustry it is required to sped moey for obtaiig the proper itermediate goods from other idustries (a 1j p 1+ a 2j p 2++ a j p ) ad reimbursig the value added (V j), such as wages, social pesio fees, profit etc So,with referece to above metioed we ca write the mathematical shape of the equilibrium model as below metioed (Hasali ad Moghsoudi, 2011) X j p j = X j (a 1j p 1 + a 2j p a j p ) + V j (211) If the both sides of equatios (211) are divided by X j, the we shall get the followig equatio p j = a 1j p 1 + a 2j p a j p + v j v j = V j X j (212) It is obvious that, a equatio (212) is simultaeous equatios These equatios could be writte i the form of matrix p 1 p 2 a 11, a 21,, a 1 a 12, a 22,, a 2 p 1 p 2 v 1 v 2 = + ( p ) ( a 1, a 2,, a ) ( p ) ( v ) P = A T P + V or (213) Here, A T - traspose matrix If we some coversio to the equatio (213) we ca get the followig equatios 4

5 Implemetatio of equilibrium-price model P = (I A T ) 1 V (214) The above metioed equatio is the mathematical expressio of Equilibrium-Price Model 30 IMPLEMENTATION AND ESTIMATES OF EQUILIBRIUM-PRICE MODEL I order to compile the 3 rd part of the I-O Table, the itermediate product ad itermediate cosumptio statistic data were obtaied from the official site of UNO ( UNcomtrade ) 4 We obtaied the data related to GVA ad GDP 5 too There are some estimates o the coutries were give i the Table 31 Although the fial product ad Gross Value Added cosists of more tha 50% of gross output i the coutries such as USA, Great Britai, Frace, Japa, Mexico, Argetie, Caada, Cyprus, Georgia, Greece, Idia, Kazakhista, Azerbaija, Egypt, Norway, Philippies, Swiss, Tuis, UAE ad Veezuela, but this poit was fixed 50% ad less for the remaiig coutries (seetable 31) Table 31: Model estimates Portio of fial VA orm Portio of fial VA orm product i the total output % cooefficiet with basis price product i the total output % cooefficiet with basis price Coutries D/GO GVA/GO Coutries D/GO GVA/GO Albaia Latvia Argetie Lithuaia Armeia Luxembourg Australia Malaysia Austria Malta Azerbaija Mexico Belarus Netherlads Belgium New Zealad Brazil Norway Bolqarısta Pakista Caada Peru Chili Philippies Chia Polad Colombia Portugal Cyprus Rep of Korea Czech Rep Rep of Moldova Demark Romaia Egypt Russia Federatio Estoia Serbia Filad Sigapore Frace Slovakia Georgia Sloveia Germay South Africa Greece Spai Hugary Sri Laka Icelad Swede Idia Switzerlad Idoesia Thailad Ira Tuisia Irelad Turkey Israel USA Italy Ukraie Japa Uited Arab Emirates

6 Hasali, Abbasov, Yusifov, IJBSR (2015), 05(04): Kazakhsta Uited Kigdom Kyrgyzsta Veezuela Now, let`s look at the implemetatio of the equilibrium-price model ad review the our research results Assume that, the value added orm goes up 10% I that case, the obtaied results are give as follows: (see: Table 32) Equilibrium Price Model shows that i the sceario of 10% icrease i value added orm i Russia, it may cause a iflatio go up by 202% i Russia This impact may spread to the parter coutries gradually by meas of trade ad o-trade trasmissio chaels Cosequetly it may geerate the import iflatio i Azerbaija about 002%, i Georgia 004%, i Kirgizista 018%, i Moldova 015%, i Ukraie 008% Model estimates show that the smaller import iflatio sesitivity amog the CIS coutries agaist the chage i macroecoomic idicator i Russia seems to be i Azerbaija ad Kazakista Table 32: The results of 10% icrease i value added orm i Russia Coutries Chage i geeral price level (%-percetage) Russia Federatio 120,240 Azerbaija 100,023 Georgia 100,040 Armeia 100,057 Kazakhista 100,00006 Kirghizista 100,181 Moldova 100,154 Ukraie 100,082 The model idicates that there is higher sesitivity i Kirgizista tha the others oe So, it poits that the coutries havig the rich atural resources have more tolerace i this cases agaist the import iflatio But the coutries havig rich atural resources should diversify the output of the idustries (fields) of the atioal ecoomy So it is very importat poit i stregheig the sustaiability of the coutry Because if coutry is depeded o exportig the atural resources, i that case while decreasig the price of atural resources it will cause o-diversified ecoomy to be suffered from the lack of foreig currecy reserves ad cosequetly devaluatio of atioal currecies It is kow that, owdays the world crises cycle becomes shorter tha the previous cetury The latest world fiacial crisis just iitially appeared i USA Cosequetly, sice the coutries havig the mutual ecoomic relatios with oe aother, it was exposed them to the certai losses too Sice US dollar revaluates agaist the other currecies, it will impact the local productio adversely Because i that case exportig goods of USA is`t expediet tha importig oes Assume that, the fial product of USA decreases by 5(five)% I that case the results of some coutries are give i the table as below metioed (see:table 33) Table 33: Results of 5% decrease i fial product of USA Losses i the volume Coutries of Total Output (US dollar) Relative to the world, percetage USA -1,445,705,221, , Azerbaija -3, , Georgia -549, , Armeia -210, , Russia Federatio -98,847, ,0068 Caada -676,672, ,046 Chia -1,098,831, ,

7 Implemetatio of equilibrium-price model Great Britai -205,107, ,014 Netherlad -121,347, ,008 Mexico -286,689, ,019 Frace -325,160, ,02 Total World -1,450,181,992, ,00 Iput-Output model aalysis shows that sceario of decrease i fial product i USA by 5%, will ifluece the total output of the world coutries differetly While reviewig the effect o the metioed sceario the most decrease i output seems to be i Chia Note that, it is show from the model that the smallest losses amog the 70 coutries seems to be i Azerbaija Studig the decrease i fial product of USA is importat for determiig the idirect iflatioary effect due to losses i the volume of the output of the coutries Additioally, the iflatioary processes arisig from the output decreasig effect i domestic commodity market could be estimated through ecoometric methods ad models o each coutries 40 CONCLUSION Hece, we have obtaied some useful ad iterestig results o the sceario of icreasig the Value Added orm i Russia Cosequetly i that case CIS coutries are to be exposed to the import iflatioary processes differetlythe estimated Equilibrium Price Model model shows that i case of 10% icrease i value added orm i Russia, it may cause iflatio go up by 202% i Russia This impact may spread to the parter coutries too So, by meas of the trade ad o-trade trasmissio chaels, it may geerate the import iflatio i Kazakista by %, i Azerbaija 002%, i Georgia 004%, i Kirgizista 018%, i Moldova 015%, i Ukraie 008% Model results idicate that the ecoomy of Azerbaija ad Kazakista have smaller import iflatio sesitivity agaist the chage i price level i Russia However, model shows that there is higher sesitivity i the ecoomy of Kirgizista i relatio to the ecoomy of Russia As wel as by stadpoit of ecoomic growth ad price stability, it was defied that due to revaluatio of the US dollar, if the fial product decreases i USA, this decreasig impact may be trasmitted to the world coutries ad cosequetly other coutries will be suffered from it So, it was foud that i the sceario of 5% decrease i fial product of USA, the smallest losses i the volume of the output appears to be i Azerbaija, but the biggest losses i Chia I order to dimiish the impacts of import iflatio ad avoid the above metioed cases each coutry should cosider the followig suggestios: The first, to stimulate the cosumptio of domestic product rather tha imported ready-made goods The secod, the coutry should dimiish the itermediate goods from the coutries impactig the prices level adversely Because the iflatio ca be imported through the itermediate goods ad it will cause cost(supply) iflatioary processes i the coutry The third, i the purpose of stregheig the foreig currecy positio ad gettig rid of ay adverse devaluatio of atioal currecy it should be expediet to export the fial cosumptio goods to the other coutries tha the raw materials It cocers the coutries which have rich atural resources The fourth, each coutry should stimulate the icrease i portio of itermediate cosumptio i total output i order to mitigate iflatio pressure iside the coutry So, it will cause diversificatio of the idustries of the coutries ad will icrease sustaiability of the ecoomy ad maitai the price stability i the coutry Note that, modellig the import iflatio arisig from mutual relatios amog the world coutries by usig the equilibrium price model has a great importace i makig decisos o the way of establishig trade relatios ad providig the welfare of the people i the coutry REFERENCES 7

8 Hasali, Abbasov, Yusifov, IJBSR (2015), 05(04): Brow, D M ad Giarratai, F, (1979) Iput-output as a simple ecoometric model: A Commet The Review of Ecoomics ad Statistics, Vol 61 (No 4), pp Hasali, Y, (2011) Modellig iteridustry relatios of the ecoomy of Azerbaija Baku Hasali, Y, & Abbasov, J (2012) Assessmet of the mutual ecoomic relatios of the coutries of the world o the basis of iput-output table Iteratioal Coferece o Ecoomic Modelig EcoMod Seville, Spai Hasali, Y, & Abbasov, J (2014) The research of mutual ecoomic relatios of the world coutries o the basis of iput-output table Ecoomics World, Vol 2, No 4, pp USA Hasali, Y & Imaov, G, (2001) Social-ecoomic developmet models of Azerbaija Baku Hasali, Y & Moghsoudi, N, (2011) Aalysis of impact of oil shocks o Ira's ecoomic situatio by iputoutput schedules Actual problems of ecoomics, 8 (122), pp Ukraie Leotief, W (1979) Evirometal repercussios ad the ecoomic structure: A Iput-Output Approach Review of Ecoomics ad Statistics, 52 (3), pp The Europea Commissio (2012) The World Iput Output Database (WIOD): Cotets, Sources ad Methods 8

East West Cluster Conference October, Udine and Grado, Italy LEED/ CEI/ EBRD Project: Clusters in Transition Economies,

East West Cluster Conference October, Udine and Grado, Italy LEED/ CEI/ EBRD Project: Clusters in Transition Economies, East West Cluster Coferece 28-31 October, Udie ad Grado, Italy LEED/ CEI/ EBRD Project: Clusters i Trasitio Ecoomies, 2001-2003 Ja Hedeliowitz, Demark, LEED Directig Committee, 22 November 2002 1 Recap: