INDUSTRIAL COUNTRY SPREADSHEET TRADE MODELS: NEW TOOLS FOR ECONOMIC ANALYSIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T00295R000400420002-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: February 7, 2012
• Sequence Number: 2
• Publication Date: December 1, 1986
• Content Type: REPORT

Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Directorate of
Intelligence
For Economic Analysis
teat ~~ ~CIr'~t.~D/~~
~ et~~~l~~c4 tai?
Industrial Country Spreadsheet
Trade Models: New Tools
EUR 86-10045
December 1986
Copy 3 7 9
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 l- - _ I I..-JJ~I_..~..-- -~-~_L____ -
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Industrial Country Spreadsheet
a Trade Models: New Tools
Directorate of
Intelligence
for Economic Analysis
This paper was prepared by
the Office of European Analysis.
European Division, EURA,
Comments and requests for copies of the models
are welcome and may be directed to the Chief, West
Confidential
EUR 86-10045
December 1986
25X1
25X1
25X1
j Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
25X1
Preface
/nJormation available
as oJ' 17 October 1986
was used in this report.
Industrial Country Spreadsheet
Trade Models: New Tooh
for Economic Analysis
Econometric models for mainframe computers have become conventional
tools for analyzing international trade flows. In a system of equations, a
model combines a theoretical representation of the economy, a statistical
analysis of the key relationships, and assumptions about external events.
The solution of the system of equations produces conditional estimates of
the future and can be used to estimate an economy's sensitivity to
alternative sets of assumptions about future developments.
The advent of economic spreadsheets, designed to operate in the personal
computer (PC) environment, provides an alternative approach to quantita-
tive economic analysis. Economic spreadsheets greatly reduce maintenance
costs and allow for greater accessibility by analysts with a minimum of
training in computer use.
This project combines the standard econometric modeling approach with
the spreadsheet approach through the use of simple econometric models
that reside in complex PC spreadsheets. As a result, advanced econometric
methods are put to work in an environment that can be maintained and
used with a minimal expenditure of time and resources.
The industrial country spreadsheet trade models can be used to examine
the impact of price, income, and exchange-rate changes on GDP and the
balance of payments. Specifically, the models are designed to gauge the
effects of changes in the prices of food, energy, raw materials, and
manufactured goods on import and export demand. The models are also
capable of estimating income effects across trading partners through the
impact on import and export demand. Because exchange rates play a
prominent role in the models by converting export prices into partner
import prices, the models can be used to measure the impact of exchange-
rate changes on domestic and trading-partner GDP and balance of
payments.
The results obtained from balance-of-payments models for each of the
developed countries, combined with a simple model of world trade
relationships, are described in this paper. The first section gives a brief
overview of the methodologies used and explains how to interpret the
results. The second section examines the individual balance-of-payments
model for each country. The third section demonstrates potential uses of
the models, including the calculation of price and income influences on the
Confidential
EUR 86-10045
December 1986
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 I I _ 1 I ~ .I ___1 .LII 1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
balance of payments. The fourth section describes the linkage model that
measures the impact of changes in any particular country on the rest of the
world. The final section demonstrates typical uses for the model by
examining the transmission of changes in GDPs, price levels, and exchange
rates between individual countries and country groups. Several appendixes
describe in greater detail the methodologies used to obtain the results.
Confidential iv
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Contents
Page
Preface
iii
Introduction
1
Individual Country Balance-of-Payments Models: Basic Structure
1
The Demand for Imports
1
The Demand for Exports
2
Balance-of-Payments Aggregates
3
Using the Country Models: Income and Price Effects
4
Income Effects
4
Price Effects
6
The Trade Linkage Model: Description
8
Structure of the Linkage Model
8
Import Determination
9
Import-Price Determination
9
Examples of Using the Trade Linkage Model
9
Impact of Changes in Big Seven Import Demand
9
Dependence on Exports to Communist Countries
9
The Impact of Exchange-Rate Changes
10
Appendixes
A. Big Seven Exchange-Rate Effects
C. Regression Results
E. Trade-Share Linkage Model
r Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Industrial Country Spreadsheet
Trade Models: New Tools
for Economic Analysis
This paper examines a set of spreadsheet models of
the balance of payments of OECD countries and the
trade linkages between those countries and their
trading partners. Each OECD member ' is modeled
separately, and the rest of the world is divided into
four aggregate groups: OPEC, Communist countries,
newly industrialized countries (NICs), and other de-
veloping countries. The methodology used here in-
volves aggregate trade in goods and services broken
down into five major commodity groups: agricultural
products, raw materials, energy, manufactured goods,
and services. The individual country models operate
on semiannual data and are generally based on rela-
tionships estimated over the 1970-85 period. The
linkage model joins the countries through trade-share
analysis: each country's exports depend on its trade
partners' imports, and import prices depend on part-
ner export prices.
The individual balance-of-payments models and the
linkage model have been designed primarily to deter-
mine the degree of trade interdependence between
countries and their trading partners. These models
can be used to measure the quantitative impact of
income, price, and exchange-rate changes in any
country or group of countries on all of its trading
partners.
More specifically, the individual country models are
used to assess the impact on a particular country of:
? Changes in world income or world prices.
? Changes in that country's income or prices.
The linkage model is used (with the country models) to
assess the impact on one or more countries of:
? Changes in income or prices in another country.
? Changes in exchange rates.
' The United States is included as a trade partner and for compari-
son purposes.
Individual Country Balance-of-Payments
Models: Basic Structure
Each country's balance-of-payments model is stored
in a separate spreadsheet containing detailed histori-
cal data, forecasts for exogenous variables, and re-
gression coefficients. The various elements interact to
produce conditional forecasts of key endogenous vari-
ables, including the current account balance. Imports
and exports of different categories of goods and
services are endogenous to the model; prices, income,
and transfers are all exogenous. A detailed display of
key sections of the model is shown in appendix D.
The Demand for Imports
The demand for imports is divided into four categories
of goods plus a services category:
? Food products.
? Raw materials.
? Energy.
? Manufactures.
? Services.
For each of the OECD countries, regression analysis
was used to relate the demand for a given category to
the country's income, the price of the goods within the
specific category, and a Koyck-lag term to capture
long-run effects. The estimation techniques are dis-
cussed in appendix B, and the estimated coefficients
may be found in appendix C. The demand for a given
import category is positively related to domestic in-
come (that is, as a country's income rises, demand for
the good also rises); it is negatively related to price (as
the price rises, demand for the good falls). The
relative price of imports is defined as the ratio of the
import price for a particular category to its export
price, which serves as a proxy for the competing
domestic price. No attempt is made to estimate price
elasticities for services, because reliable price data are
unavailable. The demand for a given import category
in any period is also positively related to the quantity
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Table 1
Imports of Goods:
Income and Price Elasticities
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
imported in the previous period. This single lagged
term indicates a declining, infinite lag structure; the
quantity imported each period depends on income and
price in all of the previous periods.
The estimated income and price elasticities have the
expected signs, and their summary statistics are
shown in table 1. This table displays the average
short-run and long-run elasticities across countries for
both price and income; the largest values among the
countries are also reported-the smallest value, zero,
is not shown. In some cases, significant results were
not obtained with the regression structure outlined
above. The alternate forms used for these regressions
are explained in appendix C.
Our regression analysis yielded insignificant coeffi-
cients for some of the countries within each category
of imports. In the cases of Greece, Iceland, Portugal,
Spain, and Turkey, this result is due to a lack of data
prior to 1982. As more data become available, our
estimation of these coefficients should improve.
Insignificant elasticities of demand were estimated in
some cases. Insufficient data were responsible for
most of these estimation problems, as some countries
only reported data from 1982. Among those countries
reporting data since 1970, a few, with small domestic
production in a particular import category, had inelas-
tic demand functions-for example, Japan for raw
materials and several other countries for energy.
The Demand for Exports
The demand for exports is divided into four categories
of goods plus a services category:
? Food products.
? Raw materials.
? Energy.
? Manufactures.
? Services.
For each of the OECD countries, regression analysis
was used to relate the demand for a given category to
world income and the price of the goods within the
specific category, and a Koyck-lag term was used to
capture long-run effects. The estimated coefficients
may be found in appendix C. The demand for a given
Short run
-0.60 (Turkey)
-0.19
Long run
-1.49 (Netherlands)
-0.33
Income
Short run
1.77 (France)
0.69
Long run
4.18 (Belgium)
1.23
Raw materials
Price
Short run
-1.15 (Denmark)
-0.33
Long run
-3.45 (Switzerland)
-0.72
Income
Short run
1.18 (Netherlands)
0.38
Long run
3.62 (Switzerland)
0.75
Energy
_
Price
Short run
-0.55 (Portugal)
-0.08
Long run
-1.62 (France)
-0.26
Income
Short run
1.30 (Portugal)
0.11
Long run
2.88 (Germany)
0.31
Manufactures
Price
Short run
-1.42 (Sweden)
-0.58
Long run
-4.21 (Ireland)
-1.26
Income
Short run
4.10 (Turkey)
1.05
Long run
4.92 (Finland)
1.91
Services
export category is positively related to world income
(that is, as the world's income rises, demand for the
good also rises). Because it is a more reliable data
series, total OECD income is used as a proxy for
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 __ i .._..~ - -- ~. l..
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
world income. Export demand is negatively related to
price (as the price rises, demand for the good falls).
The relative price of exports is defined as the ratio of
the export price for a particular category to its import
price, which serves as a proxy for the competing world
price. No attempt is made to estimate price elasticities
for services, because reliable price data are unavail-
able. The demand for a given export category is
positively related to the quantity exported in the
previous period. This lagged term indicates a declin-
ing, infinite lag structure; the quantity exported each
period depends on income and price in all of the
previous periods.
The estimated income and price elasticities have the
expected signs, and their summary statistics are
shown in table 2. This table displays the average
short-run and long-run elasticities across countries for
both price and income; the largest values among the
countries are also reported. In some cases, country
data do not conform to the regression structure
outlined above. Details concerning the forms that
were adopted in these cases and the logic underlying
the adopted forms may be found in appendix C.
Inelastic demand functions were estimated in several
cases among countries reporting data since 1970.
These results apply to countries with small domestic
production of the export categories involved, particu-
larly raw materials and energy. In the case of agricul-
ture, the prevalence of government subsidy schemes
also plays an important role in determining the esti-
mated elasticities.
Balance-of-Payments Aggregates
The export and import volumes of total goods theoret-
ically equal the sums of the component volumes of
food, raw materials, energy, and manufactures. Data-
reporting anomalies, however, lead to some divergence
between these series. To adjust for these divergences,
Table 2
Export of Goods:
Income and Price Elasticities
Short run
-1.27 (United States)
-0.29
Long run
-3.07 (United States)
-12.21
Income
Short run
1.78 (Sweden)
0.50
Long run
3.08 (Sweden)
0.96
Raw materials
Price
Short run
-0.84 (Canada)
-0.20
Long run
-1.50 (Canada)
-0.31
Income
Short run
1.98 (Netherlands)
0.45
Long run
2.45 (Netherlands)
0.67
Energy
Price
Short run
-4.09 (Norway)
-0.46
Long run -
24.40 (Norway)
-2.69
Income
Short run
5.33 (New Zealand)
0.73
Long run
25.72 (New Zealand)
3.04
Manufactures
Price
Short run
-1.17 (United States)
-0.35
Long run
-5.86 (Japan)
-1.01
Income
Short run
1.81 (Australia)
0.63
Long run
4.52 (Netherlands)
1.46
Services
bridge equations are employed for exports and im- goods export and import prices. Instead, bridge equa-
ports using a simple regression of total goods volume tions are employed for exports and imports using the
against the sum of the volume components. This simple regression of aggregate price against the
methodology is discussed in appendix B, and the weighted average of the individual prices. The regres-
regression results may be found in appendix C. Sion results may be found in appendix C.
The existence of data anomalies for many countries
also prevented the use of a simple weighted average of
commodity prices in the derivation of the aggregate
~ Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Table 3
Domestic GDP: Impact on the
Current Account Balance a
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
A similar problem arises in the conversion from total
goods volumes and prices to nominal dollar values of
exports and imports. Bridge equations are employed
in this case to adjust for these data anomalies. The
regression results may be found in appendix C.
The current account balance is defined as the sum of
the trade balance, exports of services, investment
income credits, ofTicial transfers, and private transfers
minus imports of services and investment income
debits-all reported in .dollars. The merchandise trade
balance is defined as the dollar value of goods exports
minus goods imports. Private and official transfers
along with investment income credits and debits are
taken to be exogenous to the model.
Using the Country Models:
Income and Price Effects
One of the principal assets of these models is their
ability to assess the quantitative impact of economic
growth and inflation on a country's exports, imports,
and current account balance. Specifically, they are
designed to answer questions such as:
? What is the effect of a given change in the world
price of food, energy, raw materials, or manufac-
tures on the current account balance of a specific
country?
? What is the effect of a given change in a country's
real income on the current account balance and
import volume of that country?
? What is the effect of a given change in world
income on the current account balance and export
volume of a specified country?
? What is the impact on a country's real GDP of
changes in imports or exports due to price and
income changes?
Income Effects
Two sets of scenarios were used to examine the
responsiveness of each country to domestic and world
income changes. For the first scenario, domestic
income is increased by 1 percent with no change in
world income or prices. The resulting impact on the
current account balance of each country is displayed
in table 3, while table 4 shows the impact on import
Australia
- 87
-119
-151
Austria
-747
-805
-837
Belgium
-622
-803
-923
Canada
-1,059
-1,578
-1,800
Denmark
-231
-261
-283
Finland
-224
-423
-470
France
-6,285
-9,268
-10,562
Greece
-39
-39
-39
Iceland
NEGL
NEGL
NEGL
Ireland
-121
-209
-274
Italy
-1,613
-2,066
-2,253
Japan
-1,192
-1,638
-1,820
Netherlands
-816
-1,181
-1,439
New Zealand
-112
-136
-148
Norway
-233
-288
-318
Portugal
-74
-83
-84
Spain
-151
-225
-274
Sweden
-734
-809
-860
Switzerland
-488
-676
-832
Turkey
-250
-279
-270
United Kingdom
- 3,264
-4,704
- 5,361
United States
-6,015
-9,545
-11,309
West Germany
-4,286
-6,428
-7,564
a Changes in current account balance due to a 1-percent increase in
domestic GDP.
volumes. In each case, import volume increases and
the current account balance deteriorates by an
amount that increases over time.
This type of scenario can be used to estimate the
impact of unexpected changes in GDP on a country's
current account balance. The data in table 3 show
that Japan's current account balance changes by only
$2 billion after three years of a 1-percent change in
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 -- 1 .. - - -
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 4
Domestic GDP: Impact on
Goods Import Volumes a
Percentage change in import volume due to a 1-percent increase in
domestic GDP.
Table 5
World Income: Impact on
Current Account Balances a
Finland
182
273
322
France
2,285
3,101
3,480
Greece
67
81
84
Iceland
3
4
4
Ireland
64
69
70
Italy
699
788
892
Japan
1,827
3,119
4,251
Netherlands
1,674
2,522
3,018
New Zealand
52
59
68
Norway
334
482
659
Portugal
81
89
95
Spain
375
380
390
Sweden
715
933
1,033
Switzerland
524
659
709
Turkey
273
298
329
United Kingdom
1,482
2,388
2,916
United States
1,936
3,510
4,514
West Germany
2,444
3,602
4,271
a Change in current account balance due to a 1-percent increase in
world income.
GDP, demonstrating a low level of sensitivity to
domestic changes. France's current account balance is
much more sensitive to changes in domestic GDP,
however, shifting by nearly $11 billion after three
years in response to a 1-percent change in GDP.
The second scenario measures the effect on each
country of a 1-percent increase in world income
assuming no change in domestic income or prices. The
resulting changes in current account balances and
export volumes are displayed in tables 5 and 6. As
expected, export volume and the current account
balance increases over time for each country.
This type of scenario can be used to measure the
sensitivity of individual countries to changes in the
world economy. In this case, the current account
balance in Japan is more sensitive to income changes
than in France. Japan would suffer a deterioration of
over $4 billion after three years of a 1-percent
reduction in world income, while France's current
account balance would be reduced by only $3.5
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 1. __ __ L I I I I I I. I I I I I _ 1 _ L____.-_ I __ L .I III
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 6
World Income: Impact on
Goods Export Volumes a
Percent
First Year
Se
cond Year Th
ird Year
Australia 1.0
1.2
1.2
Austria
1.7
2.2
2.2
Belgium
0.6
0.8
0.9
Canada
0.9
1.5
1.7
Denmark
1.2
2.0
2.2
Finland
0.9
1.5
1.8
France
1.4
2.1
2.3
Greece
0.9
1.3
1.4
Iceland NE
GL
NE
GL NE
GL
Ireland NE
GL
NE
GL NE
GL
Italy
0.2
0.3
0.4
Japan
0.6
1.3
1.8
Netherlands
1.9
3.1
3.7
New Zealand
0.3
0.7
1.2
Norway
2.2
5.2
8.4
Portugal
0.1
0.1
0.1
Spain
0.2
0.2
0.2
Sweden
1.6
2.1
2.2
Switzerland
1.1
1.4
1.5
Turkey
0.1
0.1
0.1
United Kingdom
1.1
2.0
2.4
United States
0.8
1.3
].6
West Germany
0.7
1.2
1.4
Percentage change in export volume due to a 1-percent increase in
world income.
billion. Although its economy is much smaller, Cana-
da would suffer a disproportionate deterioration in its
current account balance of over $2 billion because of
its heavy reliance on foreign trade.
Price Effects
Four scenarios were examined for each country to
analyze the impact of changes in the world price of
each of the goods categories. For each scenario, one
country was examined independently and faced a
10-percent increase in both the export and import
Table 7
Food Prices: Impact on
Current Account Balances a
a Change in current account balance due to a 10-percent increase in
world food prices.
price of a particular commodity. Countries that ex-
port more of the product than they import will
generally register improvements in their current ac-
count balances, and the reverse is true for countries
that import more than they export. The relative price
elasticities of import and export demand also play an
important role in this analysis, leading to unexpected
results for some countries. The results are summa-
rized in tables 7-10.
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 8
Energy Prices: Impact on
Current Account Balances a
Million US $ Table 9
Raw Materials Prices: Impact on
Current Account Balances a
Change in current account balance due to a 10-percent increase in
world energy prices.
Ireland
20
17
16
Italy
-845
-921
-984
Japan
-1,677
-1,902
-2,085
Netherlands
-25
-47
-41
New Zealand
98
100
104
Norway
-35
-38
-39
Portugal
4
3
4
Spain
-324
-333
-339
Sweden
210
223
234
Switzerland
-85
-97
-100
Turkey
-188
-230
-230
United Kingdom
-372
-416
-450
United States
980
1,319
1,536
West Germany
-509
-578
-632
a Change in current account balance due to a 10-percent increas25X1
world raw material prices.
This type of scenario would prove very helpful in
measuring the impact of the large energy price in-
creases and decreases that have occurred over the past
several years and are expected to recur in the future.
The results in table 8 clearly show the gainers and
losers-with respect to the current account bal-
ances-of an increase in energy prices. Norway, the
United Kingdom, Australia, and the Netherlands are
identified as enjoying improved current account bal-
ances as a result of increases in the price of energy.
Japan and the United States suffer the largest deteri-
oration in current account balance in this scenario.
In some cases the impact on the current account
balance reverses over time, indicating differing short-
run and long-run elasticities. In table 7, for example,
the current account balance of the United States
worsens in the first year following an increase in food
prices, but improves in later years. This outcome is a
direct result of the estimated coefficients; these show
j Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 10
Manufacturing Export Prices:
Impact on Current Account Balances a
Austria
-2,210
-6,580
-6,750
Belgium
-41
-2,453
-2,959
Canada
-2,456
-8,014
-10,577
Denmark
1,944
2,011
2,137
Finland
422
376
317
France
351
-5,882
-7,593
Greece
-16
-60
-58
Iceland
39
43
47
Ireland
-546
-2,194
-3,610
Italy
-2769
-2,083
-2,160
Japan
-167
-22,498
-38,064
Netherlands
3,804
2,223
1,453
New Zealand
-622
-874
-972
Norway
974
412
210
Portugal
478
321
329
Spain
2,690
1,953
1,363
Sweden
-926
-1,620
-1,763
Switzerland
-1,365
-5,029
-7,590
Turkey
158
-26
-3
United Kingdom
-387
-7,992
-11,575
United States
-38,430
-82,576
-107,050
West Germany
-8,793
-29,616
-39,555
a Change in current account balance due to a 10-percent increase in
manufacturing export prices.
that the long-run elasticity of demand for food im-
ports is high relative to both the short-run elasticity of
demand for food imports and the long-run elasticity of
demand for food exports.
The Trade Linkage Model: Description
A simplified model linking all of the countries, but
without commodity detail, is stored in a separate
spreadsheet containing historical data on export and
import volumes, price indexes, and bilateral trade
flows. Trade shares and the effects of trade interde-
pendence are estimated by the interaction of these
different elements. The model performs all of the
necessary conversions between dollars and other cur-
rencies and between real and nominal values. Key
sections of the model are displayed in appendix E.
Specifically, the model is designed to answer ques-
tions such as:
? What is the effect of a change in the domestic
demand of a particular country on the GDPs and
balances of payments of its trade partners?
? What is the effect of a change in the price of a
country's exports on the import price faced by its
trade partners?
? What are the impacts of particular exchange-rate
changes on other countries?
Structure of the Linkage Model
The linkage model consists of selected trade, income,
and price data for each of the OECD countries and
aggregates for the Communist countries, OPEC, the
NICs, and the rest of the world. Real GDP for each
reporter is broken down into domestic demand, ex-
ports, and imports. Domestic demand is considered
exogenous to the model; exports of goods and services
are a function of partner imports of goods and services
and bilateral trade shares; and imports are a function
of relative prices and domestic income. Price indexes
for both imports and exports are included, with export
prices exogenous and import prices a function of
partner export prices. Dollar exchange rates and
bilateral trade-flow data are included as exogenous to
the model.
The key element of the model is the trade-share.
matrix, which measures the bilateral trade flows
between each pair of reporters. Through this matrix,
an increase in any country's export price will feed into
its partners' import price, thus affecting the partner
country's import demand. Similarly, changes in im-
port demand will affect partner countries' exports.
Because exchange rates play a role in the conversion
of export prices into import prices, they also contrib-
ute to the interactions.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 _ - -. _- _ _ ......._ ... __._.. . L..__ Jd.~ i _ . ,L l _ _ 1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
The spreadsheet produces summary tables that pro-
vide results for key variables, including GDP growth
rates, current account balances in dollars, and real
effective exchange rates. These figures are calculated
using all of the simultaneous interactions present in
the model.
Import Determination
Real imports of goods and services are estimated as a
function of domestic demand and the relative price of
imports, using a geometrically declining infinite lag
structure. The values of the coefficients are calculated
using simulations of the individual country models, in
order to reflect most accurately the actual elasticities.
Each country has a different lag structure, which is
consistent with the implicit values determined using
its individual model.
The level of import demand calculated by the model
for each country is used in the determination of
partner countries' exports. A country with 25 percent
of the market in a country that increases its imports
would receive a boost to its exports equal to 25 percent
of the import increase. Because the model contains all
countries of the world, any change in total imports
will be met by an equal change in total exports
throughout the rest of the world. Imports and exports
are then combined with domestic demand to deter-
mine real GDP for each country. Only domestic
demand is determined exogenously in this model,
using OECD forecasts in most cases.
Import-Price Determination
Each country's exogenously determined export price
level feeds into its trading partners' import price
levels. These prices feed through all of the relevant
exchange rates in order to determine the actual
relative prices. The weights applied to each export
price in order to determine import prices are based on
bilateral trade shares. Countries with very close trade
relations will have closely interdependent prices.
The determination of import and export prices, com-
bined with the determination of import and export
volumes, leads directly to the calculation of the
current account balance for each country. Export
prices, exchange rates, and trade shares also combine
to determine real effective exchange rates for each
country.
Examples of Using the Trade Linkage Model
The linkage model can be used (with the country
models) to assess the impact on partner countries of
changes in economic growth, inflation, and import
demand in a particular country. Alternatively, it can
be used to estimate the impact of exchange-rate
changes. The model also offers a convenient way of
calculating various economic data, such as real effec-
tive exchange rates or imports as a share of GDP.
Impacts of Changes in Big Seven Import Demand
The trade linkage model can be used to estimate the
impact of changes in import demand in particular
countries on the GDP growth rates and the current
account balances of their trade partners. For example,
the scenarios displayed in table 11 show the effects of
a 10-percent increase in the level of import demand by
each of the Big Seven. The effects range from negligi-
ble amounts for countries with little bilateral trade to
a 3.3-percent increase in Irish GDP as a result of
increased British imports.
This type of scenario can be used to compare the
effects of applying the same policy in different coun-
tries. For example, the results in table 11 have
implications for the encouragement of "locomotive"
policies z in Japan and West Germany. According to
model results, increases in West German import
demand have a much larger impact on world GDP
than increases in Japanese imports. Policymakers can
compare the relative benefits of each country pursu-
ing this type of policy.
Dependence on Exports to Communist Countries
Another example of the model's use is the estimation
of the share of a country's GDP attributable directly
or indirectly to exports to the Communist countries.
This is done by comparing the baseline case to the
case where exports to Communist countries are cut to
zero. The calculated shares range from negligible for
several countries to 0.5 percent of GDP for Finland
' Expansionary policies in key countries designed to increase world
GDP through increased import demand.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 i~ ~ I l i i i I I 1__ I 1 .I II I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 11
Big Seven Import Demand:
Impact on World GDP a
Impact on real GDP growth of a 10-percent real increase in
import demand.
and are shown in table 12. Such calculations are very country's GDP, current account balance, and import
straightforward in the linkage model because GDP price index. The direct effect will result from a
and bilateral trade data are available in an easily change in the price of imports from the country whose
accessible spreadsheet. exchange rate has changed. Indirect effects result
from the impacts on the import prices of other
The Impact of Exchange-Rate Changes
The trade linkage model can estimate the impact of a
change in a given exchange rate on any particular
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 12
Communist Import Demand:
Contribution to Industrialized Country GDP a
Table 13
Real Effective Exchange Rates:
Movement Between March 1985
and September 1986
0.1
0.1
a DifTerence in GDP between the baseline case and the case where
exports to Communist countries are cut to zero.
2.6
6.4
8.3
8.4
- 0.8
- 5.4
16.6
- 38.3
United States -22.1 25X1
West Germany 14.7
countries, which affect exports from the country in
question. Appendix A displays the results of apprecia-
tions of each of the Big Seven currencies.
Other Uses
The model's large data base can be used to easily
make calculations that might otherwise be very time
consuming. For example, the linkage model uses its
trade-share, exchange-rate, and price data to calcu-
late real effective exchange rates. Dollar exchange
rates are deflated by unit labor costs for each country
and then converted to implicit bilateral rates for every
pair of countries. For a given reporter, weights are
applied to each of its bilateral exchange rates on the
basis of the importance of trade with the correspond-
ing partner. Both imports and exports are included in
the weighting, but less-developed and Communist
countries are excluded. Table 13 shows the changes in
real effective exchange rates since the dollar's peak
early in 1985.
Another example of using the model's data base is the
calculation as a share of GDP of a country's exports
to or imports from another geographic area. As an
i Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 14
Imports From NICs a
as a Share of GDP
3.0
4.2
3.6
1.7
2.4
0.7
Brazil, Mexico, Taiwan, South Korea, Singapore, and Hong
Kong.
illustration, table 14 shows, for each industrial coun-
try, imports from the NICs as a share of GDP. Shares
range from 0.7 percent in the United States to 6.6
percent in Canada.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 _ L _ ---.----- _ . _ .. ._ .1_ Y_____.____`l~.-._LI , I I I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Appendix A
Big Seven
Exchange-Rate Effects
Table 15a Table 15b
The US Dollar's Impact on The Japanese Yen's Impact on
Industrialized Countries Industrialized Countries
Real GDP
Growth e
(percentage points)
Current Account
Balance a
(billion US $J
First
Year
Second
Year
First
Year
Second
Year
Australia
0.2
0.3
-0.2
0.1
Austria
0.7
1.3
0.3
1.3
Belgium
0.3
0.6
-0.5
NEGL
Canada
3.1
4.7
2.9
19.4
Denmark
0.3
0.6
NEGL
0.3
Finland
0.3
0.4
-0.1
0.2
France
0.3
0.6
0.1
2.8
Greece
0.2
0.3
0.3
0.3
Iceland
I.0
1.7
0.1
0.1
Ireland
2.0
3.7
NEGL
0.6
Italy
0.4
0.7
1.1
4.1
Japan
1.1
1.7
-1.9
22.9
Netherlands
0.4
3.7
-1.0
-0.1
New Zealand
1.2
1.6
0.1
0.4
Norway
0.3
0.5
0.1
0.5
Portugal
0.4
0.7
0.1
0.2
Spain
0.4
0.6
0.1
1.5
Sweden
0.7
0.9
-0.1
1.1
Switzerland
0.6
1.0
NEGL
1.0
Turkey
0.3
0.6
0.1
0.5
United Kingdom
0.4
0.8
NEGL
3.9
United States
-1.3
-2.1
3.4
-65.0
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $J
First
Year
Second
Year
First
Year
Second
Year
Australia
0.1
0.1
-1.1
-0.8
Austria
0.5
I.0
0.2
1.0
Belgium
-0.3
-0.4
-0.5
-0.9
Canada
-0.7
-1.0
-3.2
-6.7
Denmark
-0.2
-0.2
-0.3
-0.5
Finland
NEGL
NEGL
-O.2
-O.2
France
-0.1
-0.1
-1.4
-2.4
Greece
NEGL
NEGL
-O.1
-O.2
Iceland
-0.4
-0.7
NEGL
-O.l
Ireland
O.1
O.3
NEGL
NEGL
Italy
-0.2
-0.3
-1.1
-2.3
Japan
-0.7
-1.2
20.3
2.7
Netherlands
-0.2
-0.2
-0.6
-1.0
New Zealand
1.4
2.5
NEGL
0.4
Norway
NEGL
NEGL
-O.3
-O.2
Portugal
-0.1
-0.2
-0.1
-0.2
Spain
-0.1
-0.2
-0.6
-0.8
Sweden
NEGL
-0.1
-0.3
-0.4
Switzerland
NEGL
NEGL
-O.4
-O.3
Turkey
-0.2
-0.2
-0.2
-0.4
United Kingdom
-0.2
-0.3
-2.0
-3.5
United States
0.4
0.6
- 3.2
20.6
Changes resulting from a l0-percent appreciation of the US
dollar.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 I I ., .I J I 1 1 I_ ... ~. ,. I I. I I I .. I I I I _. _ I_ I .11L 1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 15c Table 15d
The West German Deutsche Mark's The French Franc's Impact
Impact on Industrialized Countries on Industrialized Countries
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $J
First Sec
Year Ye
ond
ar
First
Year
Second
Year
Australia
-0.1 -0
.1
-0.5
-0.6
Austria
7.4 10
.7
4.0
13.7
Belgium
-0.1 NEG
L
-2.3
-2.5
Canada
-0.2 -0
.3
-I.1
-2.2
Denmark
NEGL 0
.1
-0.9
-0.8
Finland
0.3 0
.2
-0.4
-0.2
France
0.2 0
.4
- 3.4
- 1.7
Greece
0.3 0
.3
-0.2
-0.1
Iceland
-0.2 -0
.3
NEGL
-O.1
Ireland
0.7 1
.4
NEGL
0.2
Italy
0.2 0
.2
- 2.7
- 1.6
Japan
-0.1 -0
.1
-3.2
-5.6
Netherlands
0.6 1
.3
-2.1
-0.2
New Zealand
0.2 5
.7
NEGL
NEGL
Norway
0.3 0
.6
-0.4
NEGL
Portugal
NEGL 0
.1
-0.2
-0.2
Spain
NEGL NEG
L
- 1.O
-O.8
Sweden
0.7 0
.6
-0.2
0.6
Switzerland
1.1 2
.1
- 1.0
0.8
Turkey
-0.1 0
.1
-0.4
-0.5
United Kingdom
NEGL NEG
L
-3.2
-3.3
United States
0.1 0
.1
- 2.2
2.6
West Germany
-1.5 -2
.5
20.4
-0.3
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $J
First Seco
Year Year
nd
First
Year
Second
Year
Australia
NEGL -0.1
-0.2
-0.1
Austria
0.5 1.2
0.3
1.2
Belgium
0.2 0.6
-1.3
-0.7
Canada
-0.1 -0.2
-0.5
-1.0
Denmark
-0.1 NEGL
-0.2
-0.3
Finland
0.1 0.1
-0.1
NEGL
France
-0.9 -1.8
12.1
2.1
Greece
0.1 0.1
-0.1
-0.1
Iceland
-0.1 -0.2
NEGL
NEGL
Ireland
0.5 1.1
NEGL
0.2
Italy
0.3 0.4
- 1.2
0.9
Japan
NEGL -0.1
-1.4
-2.4
Netherlands
0.1 0.4
-0.7
-0.3
New Zealand
0.1 0.1
NEGL
NEGL
Norway
0.1 0.2
-0.1
0.1
Portugal
0.2 0.4
-0.1
NEGL
Spain
0.2 0.4
-0.5
0.4
Sweden
0.2 0.1
-0.1
0.2
Switzerland
0.4 0.8
-0.4
0.4
Turkey
-0.1 NEGL
-0.1
-0.2
United Kingdom
NEGL 0.1
-1.3
-0.9
United States
NEGL 0.1
-0.7
2.2
West Germany
0.1 0.2
-3.5
-2.1
Changes resulting from a 10-percent appreciation of the deutsche a Changes resulting from a 10-percent appreciation of the franc.
mark.
25X1 X1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 15e Table 15f
The British Pound's Impact The Italian Lira's Impact
on Industralized Countries on Industralized Countries
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $f
First
Year
Second
Year
First
Year
Second
Year
Australia
NEGL
-0.1
-0.4
-0.4
Austria
0.3
0.6
0.1
0.5
Belgium
-0.1
NEGL
-0.8
-0.9
Canada
-0.1
-0.2
-0.7
-1.2
Denmark
NEGL
0.1
-0.3
-0.3
Finland
0.2
0.2
-0.2
NEGL
France
0.1
0.2
-1.3
-0.8
Greece
O.l
NEGL
NEGL
-O.1
Iceland
NEGL
NEGL
NEGL
NEGL
Ireland
4.9
7.8
0.2
1.7
Italy
NEGL
NEGL
-O.7
-O.S
Japan
NEGL
-0.1
-1.7
3.0
Netherlands
0.2
0.4
-0.8
-0.4
New Zealand
0.6
0.7
NEGL
0.2
Norway
0.4
0.6
-0.1
0.3
Portugal
0.1
0.2
-0.1
-0.1
Spain
NEGL
NEGL
-O.4
-O.2
Sweden
O.S
O.S
NEGL
0.7
Switzerland
0.3
0.4
-0.2
0.2
Turkey
NEGL
0.1
-0.1
-0.1
United Kingdom
-0.8
-1.2
12.4
6.4
United States
0.1
0.1
- 1.0
2.3
West Germany
NEGL
NEGL
-2.S
-2.S
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $J
First
Year
Second
Year
First
Year
Second
Year
Australia
NEGL
-0.1
-0.2
-0.1
Austria
1.7
4.0
0.9
2.8
Belgium
NEGL
NEGL
-O.3
-O.4
Canada
-0.1
-0.2
-O.S
-1.0
Denmark
NEGL
NEGL
-O.2
-O.2
Finland
0.1
0.1
-0.1
NEGL
France
0.3
0.4
- I.0
1.0
Greece
0.3
0.3
NEGL
0.1
Iceland
-0.1
-0.2
NEGL
NEGL
Ireland
0.2
0.4
NEGL
0.1
Italy
- 1.4
- 2.0
6.7
- 2.1
Japan
NEGL
-0.1
-1.3
-2.5
Netherlands
0.1
0.2
-0.2
-0.1
New Zealand
0.1
0.1
NEGL
NEGL
Norway
NEGL
NEGL
-O.1
-O.1
Portugal
0.1
0.1
-0.1
-0.1
Spain
0.1
0.1
-0.3
NEGL
Sweden
0.1
NEGL
-O.1
0.1
Switzerland
0.6
0.9
-0.1
0.7
Turkey
NEGL
0.1
-0.1
-0.1
United Kingdom
NEGL
NEGL
-O.8
-O.9
United States
NEGL
0.1
-O.S
2.3
West Germany
0.1
NEGL
-2.3
-1.7
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Table 15g
The Canadian Dollar's Impact
on Industrialized Countries
.
Real GDP
Growth a
(percentage points)
Current Account
Balance a
(billion US $J
First
Year
Second
Year
First
Year
Second
Year
Australia
-0.1
-0.2
-0.2
-0.4
Austria
NEGL
NEGL
NEGL
NEGL
Belgium
-0.2
-0.1
-0.1
-0.4
Canada
-2.2
-3.3
4.1
-7.8
Denmark
-0.1
-0.1
-0.1
-0.2
Finland
NEGL
NEGL
-O.1
NEGL
France
NEGL
NEGL
-O.S
-1.1
Greece
NEGL
-O.l
NEGL
-O.1
Iceland
-0.3
-O.S
NEGL
-O.1
Ireland
-0.1
-0.1
NEGL
NEGL
Italy
-0.1
-0.2
-O.S
-1.1
Japan
-0.2
-0.3
-4.9
-9.3
Netherlands
-0.1
-0.1
-0.2
-0.4
New Zealand
NEGL
NEGL
-O.I
-O.1
NOiWay
NEGL
NEGL
-O.l
NEGL
Portugal
-0.1
-0.1
NEGL
-O.1
Spain
-0.1
-0.1
-0.2
-0.4
Sweden
-0.1
-0.2
-0.2
-0.3
Switzerland
-0.1
-0.2
-0.2
-0.3
Turkey
-0.1
-0.1
NEGL
-O.2
United Kingdom
-0.1
-0.1
-0.7
-1.3
United States
O.S
0.8
4.S
33.8
West Germany
-0.1
-0.2
-1.1
-2.4
Changes resulting from a 10-percent appreciation of the Canadian
dollar.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Appendix B
Data and Methodology
The data for this project are all obtained on floppy disk from the OECD, Paris.
The series are reported on a semiannual basis, generally beginning with the first
half of 1970. New diskettes become available each June and December, and the
balance-of-payments spreadsheets are designed to incorporate revised and updated
data by using the Lotus 1-2-3 File/Combine command. No labor-intensive data
maintenance or update procedure is required.
Koyck Lags
Econometric relationships often assume that the dependent variable depends not
only on the current values of the independent variables but also on their values in
earlier periods. Direct estimation of the coefficients of these lagged variables is
usually impossible, however, as a result of multicollinearity and degrees-of-
freedom problems. The Koyck-lag approach gets around this difficulty by
including the dependent variable, lagged one period, among the independent
variables. This is functionally equivalent to expressing the dependent variable as a
function of the values of the independent variables in the current and all preceding
periods.
This relationship can be illustrated by the estimation of imports (m) in period t as a
function of prices (p) in period t, income (y) in period t, and imports in period t-1;
that is:
M~=aXP~+bXY~+cX,_,
Similarly for period t-1
M,_,=aXP,_,+bXY,_,+cXM,_Z
Substituting the second equation into the first yields
M~=aXP,+bXY,+cXaXP,_,+cXbXY,_,+c2XM,_Z
The substitution process can then be successively repeated to eliminate M,_Z,
Mt_3, and so on, leaving only current and lagged values of prices and income on
the right-hand side of the equation.
The principal drawbacks of the Koyck method are that it imposes a geometrically
declining lag structure and-more important-that it imposes the same lag
structure on all of the independent variables. We believe that these shortcomings
are outweighed by the Koyck method's ease of use and by the fact that it has won
widespread acceptance in econometric model building.
s Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Bridge Equations
Because aggregate and component data series are generally created through the
use of different methodologies, a lack of consistency exists in the OECD balance-
of-payments data bank. To correct for these anomalies, bridge equations are
employed in the individual country balance-of-payments models. Bridge equations
are created by regressing one serfs against another in cases where the two series
should theoretically be equivalent
For example one source may provide data on total exports while another provides
data on exports by category. If the value for total exports created by adding
together the components does not match the reported aggregate value, the
following equation will be estimated, where X 1 and X2 are two series that should
be equivalent but are calculated in different ways:
If the data sources are consistent, the estimated value for a will be close to zero
and the value for b will be close to one. Coefficients that diverge significantly from
these values identify data with a high degree of inconsistency. The econometrically
estimated coefficients allow us to create a historically consistent aggregate series
from its components.
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 -~- - ---_ ... _~ _ ~ ~~ I . I i I I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Appendix C
Regression Results
The general form of the regressions uses a price and income term, combined with a
Koyck lag. In some cases-primarily because of insufficient data-unacceptable
results were obtained when using the form based on price, income, and lagged
quantity. In these cases, acceptable results were obtained by employing one of four
alternate forms:
? Income and lagged price.
? Income, price, and lagged price.
? Price, income, and lagged income.
? Price and lagged income.
In all cases, the usual infinite lag was replaced by cone-period lag. For services,
attempts to incorporate lag terms were unsuccessful. The specific results are
identifiable, by heading, in this appendix.
1 Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 Declassified in Part -Sanitized Copy Approved for Release 2012/02!07:CIA-RDP89T00295R000400420002-9
Australia Austria Belgium/ Canada Denmark Finland France Greece Iceland Ireland Italy Japan Netherlands New Norway Portugal Spain Sweden Switzerland Turkey United United West
Luxembourg Zealand Kingdom States Germany
Declassified in Part -Sanitized Copy Approved for Release 2012/02!07:CIA-RDP89T00295R000400420002-9
 -L- _~ ~ ~ I ..J ----- -~~i-1----- - 1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Appendix D
Individual Balance-of-Payments Models
Models for individual countries were created in the environment of the Lotus 1-2-3
spreadsheet package. The regressions were estimated using the Lotus 1-2-3
regression facility, and the spreadsheet format is used to combine historical data
and regression results for forecasting and scenario analysis. This appendix consists
of the econometric representation of the typical country model. The coefficient
values for each country are listed in Appendix B. Copies of the models on floppy
disk are available on request from the West European Division, EURA.
MAG Agricultural products: import volume
MAGPI Agricultural products: import price index
MEN Energy products: import volume
MENPI Energy products: import price index
MG Total goods: import volume
MGPI Total goods: import price index
MMG Manufactured goods: import volume
MMGPI Manufactured goods: import price index
MRM Raw materials: import volume
MRMPI Raw materials: import price index
NCABD Current account balance: current dollars
NIICD Investment income: credits in current dollars
NIIDD Investment income: debits in current dollars
NMGD Total goods: imports in current dollars
NMSD Nonfactor services: imports in current dollars
NOTD Net official transfers: current dollars
NPTD Net private transfers: current dollars
NTBD Trade balance: current dollars
NXGD Total goods: exports in current dollars
NXSD Nonfactor services: exports in current dollars
XAG Agricultural products: export volume
XAGPI Agricultural products: export price index
XEN Energy products: export volume
XENPI Energy products: export price index
XG Total goods: export volume
XGPI Total goods: export price index
XMG Manufactured goods: export volume
XMGPI Manufactured goods: export price index
XR Exchange rate: domestic currency units per dollar
XRM Raw materials: export volume
XRMPI Raw materials: export price index
YD Domestic income: volume
YW World income: real dollars
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 ii ~ ~ I I l .III I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Import Demand
(1) log(MAG) = al + a2 X log(MAGPI/XAGPI) + a3 X log(YD) + a4 X log(MAG(-1))
(2) log(MEN) = al + a2 X log(MENPI/XENPI) + a3 X log(YD) + a4 X log(MEN(-1))
(3) log(MRM) = al + a2 X log(MRMPI/XRMPI) + a3 X log(YD) + a4 X log(MRM(-1))
(4) log(MMG) = al + a2 X log(MMGPI/XMGPI) + a3 X log(YD) + a4 X log(MMG(-1))
Export Demand
(5) log(XAG) = al + a2 X log(XAGPI/MAGPI) + a3 X log(YW) + a4 X log(XAG(-1))
(6) log(XEN) = al + a2 X log(XENPI/MENPI) + a3 X log(YW) + a4 X log(XEN(-1))
(7) log(XRM) = al + a2 X log(XRMPI/MRMPI) + a3 X log(YW) + a4 X log(XRM(-1))
(8) log(XMG) = al + a2 X log(XMGPI/MMGPI) + a3 X log(YW) + a4 X log(XMG(-1))
Total Goods Bridge Equations
(9) MG = al + a2 X (MAG + MEN +MRM +MMG)
(10) XG = a 1 + a2 X (XAG +XEN +XRM +XMG)
(11) MGPI = a 1 + a2 X MAG X MAGPI + MEN X MENPI + MRM X MRMPI + MMG X MMGPD
MAG + MEN +MRM +MMG
(12) XGPI = a 1 + a2 X XAG X XAGPI + XEN X XENPI + XRM X XRMPI + XMG X XMGPD
XAG +XEN +XRM +XMG
(13) NMGD = al + a2 X (MG X MGPD / XR)
(14) NXGD = al + a2 X (XG X XGPD / XR)
Current Account Balance Aggregates
(15) NTBD =NXGD -NMGD
(16) NCABD =NTBD + NXSD - NMSD + NIICD - NIIDD + NPTD + NOTD
25X1
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 i ... .I . J1 _. ... I I I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Appendix E
Trade-Share Linkage Model
This model was created in the environment of the Lotus 1-2-3 spreadsheet
package. The regression results were obtained from the individual country models
and are combined in this spreadsheet in order to examine interactions between
trade partners. These results can help with both forecasting and scenario analysis.
This appendix consists of the econometric representation of key parts of the trade
linkage model. Copies of this model are available on request from EURA/WE.
DD; Real domestic demand: country ;
EX; Real exports: country ;
EXPI; Export price index: country ;
GDP; Real GDP: country ;
IM; Real imports: country;
IMPI; Import price index: country ;
REXR; Real effective exchange rate: country ;
SH; ~ Country ;imports: share coming from country ~
ULC; Unit labor cost: country ;
XR; Exchange rate: units of country ;currency per dollar
Real GDP
(1)GDP;=DD;+EX;-IM;
Import Demand
(2) log(IM;) = al + a2 X log(DD;) + a3 X log(IMPI;/EXPI;) + a4 X
log(DD;(-1)) + a5 X log(IMPI;(-1)/EXPI;(-1)) and so on
Export Demand
(3) EX; = IMI X SH,; + IM2 X SHZ; + IM3 X SH,; and so on
Import Price Index
(4) IMPI; = EXPI1 X SH;, + EXPI2 X SHi2 and so on
Real ERective Exchange Rate
(5) REXR; =ULC; / XR; X ((SH,; + SH;,) / 2 X XR1 / ULC1 +
(SHZ; + SHjz) / 2 X XR2 / ULC2 and so on)
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
 I! . I I I I 11 I _. II_ ... ; I ,I I I I _.. I I I I I I III I
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9
Confidential
Confidential
Declassified in Part -Sanitized Copy Approved for Release 2012/02/07 :CIA-RDP89T00295R000400420002-9