Skip Navigation | ANU Home | Search ANU | Search RSPAS | Directory | RSPAS Home

The APEX General Equilibrium Model of the Philippine Economy

Background
Model characteristics
Major components of equation system

Background

The APEX model of the Philippine economy was initially a product of a collaborative research project conducted by a team of Philippine and Australian economists between 1989 and 1992. This project was funded by the Australian Centre for International Agricultural Research (http://www.aciar.gov.au). The core personnel involved two teams, one based in Manila, the Philippines, and one based in Canberra, Australia.

The Philippine team was led by Dr V. Bruce J. Tolentino, then Undersecretary of the Ministry of Agriculture, Government of the Philippines. Its principal members included Arsenio Balisacan, Ramon L. Clarete, Marie Angelique C. Cruz and Ma. Nimfa F. Mendoza, all then at the University of the Philippines, Diliman, Quezon City, the Philippines, and Beulah C. Dela Pena, then of the Ministry of Agriculture, Government of the Philippines.

The Australian Team was led by Peter G. Warr, John Crawford Professor of Agricultural Economics at the Australian National University. Its principal members included Zita Albacea, Ian A. Coxhead, Elsa A. Lapiz, Hom M. Pant and Agus Setiabudi.

Subsequent work, by members of the above teams and others have developed the core model in new directions.

[Return to top of page]

Model characteristics

The APEX model is a single-period, real, micro-theoretic general equilibrium model of the Philippine economy, designed primarily to address micro-economic policy issues. It provides a disaggregated and detailed representation of the Philippine economy which focuses on intersectoral and income distributional issues. The model incorporates the results of a large econometric research program which estimated the economic behavioral parameters underlying the model. The outcome of this empirical work is that every element of the Social Accounting Matrix data base and every behavioral parameter entering the model is based on original empirical work using Philippine data. Few if any applied general equilibrium models, constructed for any country, can make a comparable claim. The model shares some structural features with the influential ORANI general equilibrium model of the Australian economy (Dixon, et. al., 1982), constructed by the Centre of Policy Studies at Monash University, Melbourne Victoria (http://www.monash.edu.au/policy/), which is also a Johansen-type model, but in APEX these features have been adapted in light of the realities of the Philippine economy. APEX also uses the GEMPACK general equilibrium modeling software package developed by the Centre of Policy Studies (http://www.monash.edu.au/policy/gempack.htm).

APEX recognizes a total of 50 producer goods and services produced by 41 industries. Three of these are multi-output regional agricultural industries, each jointly producing 12 agricultural producer goods. These agricultural industries are each located in one of the three principal geographic regions of the country - Luzon, Visayas, and Mindanao. Each region produces an identical set of products consisting of 12 agricultural crop and livestock commodities, in proportions which vary across the three regions, and which depend on relative commodity prices. The elasticities of product transformation governing these supply responses were estimated econometrically for each of the three regions and thus reflect differences in regional production conditions. Each of the remaining 38 non-agricultural industries of the model produces an individual non-agricultural producer good or service, making a total of 50 commodities represented.

Three primary factors are mobile among the various non-agricultural industries of the model: variable capital, skilled labour, and unskilled labour. Variable capital includes non-agricultural land and structures which are not necessarily devoted to any particular production activity. When relative prices change, it is possible for owners of such assets to rent them out to producers facing more profitable circumstances. Unskilled labour is also freely mobile between the non-agricultural and agricultural parts of the economy. Skilled labour and variable capital are not used in agriculture but are mobile among the non-agricultural industries of the model. Skilled labour is defined as those in the work force who are capable of performing tasks requiring more than a specified level of work experience, training, or both. While skilled labour can presumably perform unskilled tasks, the model treats these two kinds of labour as distinct.

Besides these variable factors, there are two sets of fixed primary factors, agricultural land and sector-specific capital. Agricultural land is specific to each of the regional agricultural industries of the model, but changes in the output mix within each of the multi-product regional agricultural industries, in response to changing commodity prices, imply that agricultural land may be reallocated among the twelve agricultural outputs of the model. Region and sector-specific capital consists of physical capital assets devoted to a particular line of production activity. There are 41 of these sector-specific factors, one for each of the three agricultural regions and each of the 38 non-agricultural industries. Changes in relative prices do not cause any reallocation of such capital inputs in the short run. The length of run implicit in the model's comparative static adjustment processes should be thought of as between two and four years.

[Return to top of page]

The equation system contains the following major components:

• A factor demand system which relates the demand for each primary factor to industry outputs and prices of each of the primary factors. This reflects the assumption that factors of production may be substituted for one another in ways that depend on factor prices and on the elasticities of substitution between the factors.
• An intermediate good demand system. This system of equations assumes that intermediate goods are used in each industry in proportion to the output produced (the Leontief assumption).
• Zero profit conditions for each industry. This system may be thought of as determining specific factor returns from commodity prices, intermediate good prices and mobile factor returns.
• Demands for imported and domestically produced versions of each good. This set of equations incorporates Armington elasticities of substitution between these two versions of the good, estimated from trade data obtained from the Philippine Customs Department.
• A complete consumer demand system based on 12 consumer goods. The demand system is estimated from the 1985 and 1988 Family Income and Expenditure Survey compiled by the Philippines' National Statistics Office. Five individual households are distinguished, differentiated in each case by income quintiles.
• Income determination equations for each of the five households, based on their endowments of factors of production, the rates of return to these respective factors and transfers from elsewhere in the system. This system of equations reflects data derived from the 1988 Family Income and Expenditure Survey and other sources.
• Market clearing conditions for each commodity and factor of production. These equations ensure that aggregate demand does not exceed aggregate supply for that commodity or factor.
• Rates of excise taxes and import tariffs by commodity, value-added and corporate income taxes by industry and personal income tax rates by household which reflect Philippine tax collection rates.
• A set of macroeconomic identities which ensures that standard macroeconomic accounting conventions are preserved. The assumption of constant returns to scale enters the model through the factor demand and intermediate good demand functions, which are each homogeneous of degree one in output, and through the zero profit conditions, which relate unit commodity prices to unit costs of production. All behavioral functions are homogeneous of degree zero in prices. The nominal exchange rate is fixed exogenously. Its role within the model is to determine the domestic nominal price level. Thus, for example, a ten per cent increase in the exchange rate will result in a ten per cent increase in all nominal domestic prices but no change in any quantity determined within the model. Since there is no monetary sector, the nominal exchange rate plays no role in the achievement of trade balance. This balance is accomplished by endogenous adjustments in the 'real exchange rate', the ratio of a weighted average of traded to non-traded goods prices.