Annex I
The Policy Analysis Matrix (PAM)
Simply defined a policy analysis matrix is a tool that allows us to examine the impact of policy by
constructing two enterprise budgets-- one valued at market prices, the other valued at social prices. The
impact of policy is then assessed as the divergence between the private and social values. The PAM, once
assembled, provides a convenient method of calculating the measures of policy effects and the measures
of competitiveness and comparative advantage.
The enterprise budgets used to construct the PAM comprise revenue and cost data for the production
and marketing of a specific commodity. The PAM uses two accounting identities. One accounting
identity calculates profit as the difference between revenues and cost. The other accounting identity
calculates the value of the divergence (distortion) induced by policy as the difference between social and
market values.
The PAM (see Table A1) is a matrix comprised of columns and rows. This structure allows the two
accounting identities to be easily laid out and therefore the profits and divergences to be easily calculated.
The first column in the PAM records data on revenue. The next two columns separate the cost items into
tradable and non-tradable components. In each column value is a product of the quantity and the price.
Thus, in constructing the PAM intermediate inputs such as seeds, fertilizers, pesticides, and transportation
are separated into tradable and non-tradable components. The final column is calculated as a result of the
following identity, viz., Profits = Total Revenue - Total Costs. Thus, the final column of the PAM
measures profitability as the difference between revenues and costs.
The first two rows of the PAM value the revenues and costs (and thereby the profits) using different
valuation methods. The first row of the PAM values the revenues and costs using market prices. The
effects of policies (distortions) are captured in the market prices. The second row of the PAM values the
revenues and costs using social prices. Social prices are the efficiency prices, thus these represent values
that are devoid of policy-induced distortions. The final row in the table enforces the second identity used
in the PAM, viz., Distortion = Market Price - Social Price. Thus, the third row calculates the distortion (or
divergence) in revenues, costs, and profits.
Table A1. The Policy Analysis Matrix
|
Benefits |
Costs | |||
|
Gross revenue |
Tradable Inputs |
Domestic factors |
Net Profit | |
|
Budget at: Market prices |
A = Pid * Qi |
B = Pjd * Qj |
C = Pnd * Qn |
~D |
|
Budget at: Social Prices |
E = Pib * Qi |
F = Pjb * Qj |
G = Pns * Qn |
H |
|
Divergences |
1 |
J |
K |
T |
Where:
Pid
Pjd
Pib
Pjb
Pnd
Pns
Qi
Qj
Qn
domestic price of output i
domestic price of tradable input j
border price of output i
border price of tradable input j
market price of non-tradable input n
shadow price of tradable input n
quantity of output
quantity of tradable input.
quantity of non-tradable input.
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