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Appendix 6: Measuring the Impact of Relative Price Changes on the Current Account Balance

Author(s):
Nagwa Riad, Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Jarkko Turunen
Published Date:
January 2012
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Changes in a country’s exports obtained in the simulation described in Appendix 2 are fed back into the current account balance relative to GDP in two ways. First a fall in exports in each sector for example would lead to a fall in the DVA by a certain fraction. That is, the denominator will fall. The extent of the fall in GDP can be computed using the input-output tables as follows:

where dY is the change in GDP, v is a row vector of value added in each sector, L is the Leontief matrix, and dE is a column vector of changes in exports in each sector.

The second channel is through a fall in imports of intermediate inputs and final (capital and consumption) goods. A fall in exports would lead to a fall in imports of intermediate inputs. The extent of the fall in intermediate imports is:

where dtntM is a column vector of the change in imports of intermediate inputs by sector and AM is the imported inputs coefficients matrix. The extent of the fall in final goods imports are:

where dfinM is a column vector of the change in imports of final goods by sector and mpm is a column vector of marginal propensity to imports by sector.

The overall effect of the simulation results is summarized in Section A in Chapter 3.

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