THE USE OF EXTRANEOUS INFORMATION IN THE DEVELOPMENT OF A POLICY SIMULATION MODEL

responses to price that determine the economic well
being of individual commodity sectors and national
agriculture resulting from a change in agricultural
policy. Hence, in the simulation model developed in
this study, the non price-related supply and demand
shifters (with the exception of government acreage
diversions in some simulation runs) are fixed while
direct and cross price elasticities of supply and
demand allow adjustments in supplies and demands
following a change in economic environment of
farmers.

The procedure is to multiply the direct and cross
price elasticities for a commodity series (say feed
grain acreage) by the percentage change between
calculated and base estimates for the relevant price
variables (say previous year prices of feed grains,
wheat, soybeans, and cotton). The results of these
calculations are summed, added to' one, and then
multiplied times the base estimate for the series (feed
grain acreage in time t). Since the long run response
of supply and demand to a sustained price change
often differs from the short run response, each
relation allows for cumulative price response via an
adjustment coefficient.

To illustrate the general procedure, the equation
to estimate feed grain harvested acreage for the 1973
cropyearis:

In short, the percentage price changes are
confronted with the appropriate direct and cross
elasticities to estimate the change in commodity
supply and demand related variables.

Figure 1 indicates the implicit functional
relationships of the model. With the exception of
identities and variable levels determined by physical
relationships and indexing procedures, the causal
relations are tied together with a-priori elasticity
estimates.

As is indicated by Figure 1, the model is
recursive. Harvested acreages for feed grains, wheat,
soybeans and cotton are related to previous year
prices for the four crops and the index of prices paid
by farmers. Deviations from base crop yield estimates
depend on the percentage change in previous year-
price for the respective crop and the index of prices
paid. The product of acreage and yield is used to
estimate production for each crop. Production
expenses per acre for each crop are adjusted for
Γ^cftangqs in the previous year price of the crop and
changes in the index of prices paid. Total production
expenses for each crop are defined as the product of
that crop’s acreage and expenses per acre. The crop
supply identities include production, imports and
carryover. Crop prices are dependent on the
percentage change in calculated crop supplies and the

Calculated
Feed Grain
Acreage

1972

Base Feed
Grain
Acreage

1972

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