Annex 4 analytical methods

The Modular Agricultural GeNeral Equilibrium Tool (MAGNET) is a multi-region computable general equilibrium model which is a derivative of the well-known Global Trade Analysis Project (GTAP) model. It is developed and applied at Wageningen Economic Research (WECR) at  Wageningen University and Research (WUR) and is also employed by the Thünen Institute (TI) and the Joint Research Centre (JRC/D).

MAGNET is calibrated to the latest version of the GTAP database which describes production, use and international trade flows of goods and services, as well as primary factor use differentiated by sectors. The GTAP database distinguishes 141 countries or regions (among them the 27 EU member states), 65 sectors and 8 factor endowments. It is based on country input-output tables and includes consistent bilateral trade flows, transport and protection data. Additional datasets are used for specific MAGNET modules, among them data coming from the International Energy Agency (IEA), the Food and Agriculture Organization of the United Nations (FAO), the United States Department of Agriculture (USDA), the Clearance Audit Trail System (CATS) database for CAP analysis. The choice of regions and sectors from the database can be flexibly aggregated to set-up specific model versions.

MAGNET consists of a system of three types of equations. Firstly, 'behavioural equations' employing 'convenient' mathematical functions represent, under conditions of constrained optimisation, the theoretical tenets of neoclassical economic demand and supply. Subject to a series of 'market clearing' (i.e., supply equals demand) and 'accounting' equations (i.e., income equals expenditure equals output; zero 'economic' profits) consistent with the underlying accounting conventions of the database, the model enforces 'equilibrium'. To solve the model, the number of equations and (endogenous) variables within the system must be the same (known as the model 'closure'). Additional variables under the direct control of the modeller (defined as 'exogenous'), which capture market imperfections (tax rates), factor endowments or technological change, can be manipulated or 'shocked', whereupon the model finds a new matrix of prices and quantities to arrive at a post-shock equilibrium subject to the aforementioned accounting and market clearing restrictions.

A key strength of the MAGNET model is that it allows the user to choose a la carte those sub-modules of relevance to a specific study. The user can (inter alia) choose between different nesting structures, apply different assumptions about the workings of the factor markets, include different agricultural-, trade- and biofuels-policy mechanisms and incorporate dynamic assumptions relating to investment allocation over time periods.

To characterise the peculiarities of agricultural markets, the model accounts for the heterogeneity of land usage by agricultural activity; a regional endogenous land supply function; the sluggish mobility of capital and labour transfer between agricultural and non-agricultural sectors with associated wage and rent differentials; the inclusion of explicit substitution possibilities between different feed inputs in the livestock sectors; and additional behavioural and accounting equations to characterise EU agricultural policy mechanisms (e.g., production quotas, single farm payment, coupled payments, rural development measures). For the CAP module, additional coupled and decoupled policy variables are included to allow or a finer representation of CAP policy shocks. Furthermore, a detailed set of CAP policy payments, taken from the Clearance of Accounts Audit Trail System (CATS) database (DG AGRI) are used as a basis for calculating ‘CAP reference scenario’ shocks. In addition, an ‘own-resources’ module is included within the CAP budget accounting equations. Further modelling enhancements are incorporated including of ‘first’ and ‘second’ generation biofuels, GHG emission, water indicators. Other modules include treatment of waste, enhancement of labour market, fishery, inclusion of other climate policies and damage function and a specific module on Sustainable Development Goals (SDGs) indicators.

The results of the MAGNET model are typically presented in value terms or in price and quantity percentage changes. The MAGNET model compiles a large number of indicators, in particular related to production, trade flows, consumption, use of endowments, intermediate input use, income and price changes, land use, emissions, employment. As an additional tool of analysis, this study draws on the GEMPACK decomposition method. On running a complex scenario with an array of shocks (i.e., endowments, tariffs, technology change etc.), it is possible to calculate the part-worth of the resulting endogenous variable change that corresponds to a specific exogenous shock, or pre-specified group of exogenous shocks. Thus, when comparing each of the scenarios with the reference scenario, the comparative ‘part-worth’ importance of each of the policy indicators is evaluated in order to better understand the role that policy has to play (if any) in shaping bio-based market trends.

Te key inputs used for the model:

• Value of Margins on international trade (GTAP database)
• Value of Bilateral imports and exports (GTAP database)
• Value of Intermediate and production factors use by industries (GTAP database)
• Value of commodity outputs (GTAP database)
• Value of Capital stock (GTAP database)
• Value of Tax revenues (GTAP database)
• Ad-valorem rate of several tax instruments (GTAP database)
• Income elasticities (GTAP database)
• Armington elasticities (GTAP database)
• Production elasticities (GTAP database)
• EU Agricultural Production and net trade (DG AGRI Agricultural Outlook)
• GHG emission for the (EU Reference Scenario 2016 on energy, transport and climate action; GECO)
• Land supply (FAOSTAT)
• CAP payments (CATS database)
• GDP and population projections (various sources)

The use of MAGNET requires, at a minimum, an understanding of the standard GTAP model and an ability to read GEMPACK code.

• Macroeconomic variables (GDP, welfare, value added, savings-investments, current account, world prices)
• Sectorial indicators (production, consumption, prices, bilateral trade)
• Production factors (employment, wage, land use and price, capital)
• Additional indicators tailored on the study (water, bioenergy, biofuel, …)
• Nutrition indicators
• Food security indicators (availability, access, utilisation)
• GHG indicators (CO2, Non-CO2)
• Sustainable Development Goals Indicators

MAGNET analyses the economy-wide and distributional impacts of policy and/or structural shocks, sectoral transmission of sector-specific policies for sectors, agents and regions. The output of MAGNET includes projections of input-output tables, GDP, employment, bilateral trade, capital flows and household consumption. The explicit formulation of representative households allows the derivation of welfare indicators.

This economic simulation model, as a contribution to this impact assessment process, can provide insights into the effects of different policy scenarios on international trade and competitiveness.

The model is designed to conduct policy experiments, in which a reference scenario or baseline is first simulated over a future period and then, after changing one or more underlying assumptions (all kind of police instruments, tax, tariffs...), a new scenario incorporating these changes is run, also over the same time period. Comparison of the new scenario with the reference scenario at a given point in the simulation period, usually in terms of percentage differences, establishes the direction and relative magnitude of the impacts on all the endogenous variables of the change that is depicted in the hypothetical scenario at that point in time.

• Agriculture and rural development 
• Economy, finance and the euro 
• Energy 
• Environment 
• Regional policy