Competition, Concentration, and Anti-Trust Laws in the USA
Currently the US FTC has been having hearings on concentration, competition, and anti-trust laws in the USA. Several conferences are organized starting with September 2018. I present links to hearings details and videos of the sessions. As of now, two hearings have already taken place. I have given the links to the third hearing below. Economists Joe Stiglitz and Jason Furman have given speeches and presentations during first and second hearings.
Key Sources of Research:
Hearings on Competition and Consumer Protection in the 21st Century
The Federal Trade Commission will hold a series of public hearings during the fall and winter 2018 examining whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection law, enforcement priorities, and policy. The PDF version of this content includes footnotes and sources. All the hearings will be webcast live.
Public traded companies are always under pressure to show earnings growth and sales revenue growth to enhance shareholder value.
How do they do it when markets have matured and economy has slowed?
Increase Market Share
How do then companies lower their costs?
Vertical Mergers and Acquisitions
Outsourcing (Sourcing parts and components / Intermediate Goods / Inputs from cross border)
Offshoring (Shifting Production cross border)
How do then companies increase their market share?
Horizontal Mergers and Acquisitions
Cross Border Markets Share (Sales in other countries)
In the last thirty years, this is exactly what has happened in US economy.
Macro Trends of increase in Outsourcing/Offshoring, Increase in Market Concentration, Oncrease in Inequality, Increase in Corporate Profits, Rising Equity Prices, Slower Productivity Growth, Lower Interest Rates, Low Labor Share, and Capital Share.
Please see my other posts expanding on these issues.
Please note that these forces are continuing and trends will remain on current trajectory.
Stakeholder vs Shareholder Capitalism
Slow Productivity Growth
Rising Market Concentration
Rising Equities Market
Dupont Ratio Analysis
Financial Planning (Micro – Firm Level)
Economic Planning (Macro- Aggregate Level)
From SHAREHOLDER CAPITALISM: A SYSTEM IN CRISIS
Our current, highly financialised, form of shareholder capitalism is not just failing to provide new capital for investment, it is actively undermining the ability of listed companies to reinvest their own profits. The stock market has become a vehicle for extracting value from companies, not for injecting it.
No wonder that Andy Haldane, Chief Economist of the Bank of England, recently suggested that shareholder capitalism is ‘eating itself.’1 Corporate governance has become dominated by the need to maximise short-term shareholder returns. At the same time, financial markets have grown more complex, highly intermediated, and similarly shorttermist, with shares increasingly seen as paper assets to be traded rather than long term investments in sound businesses.
This kind of trading is a zero-sum game with no new wealth, let alone social value, created. For one person to win, another must lose – and increasingly, the only real winners appear to be the army of financial intermediaries who control and perpetuate the merry-goround. There is nothing natural or inevitable about the shareholder-owned corporation as it currently exists. Like all economic institutions, it is a product of political and economic choices which can and should be remade if they no longer serve our economy, society, or environment.
Here’s the impact this shareholder model is currently having:
• Economy: Shareholder capitalism is holding back productive investment. Even the Chief Executive of BlackRock, the world’s largest asset manager, has admitted that pressure to keep the share price high means corporate leaders are ‘underinvesting in innovation, skilled workforces or essential capital expenditures.’ 2
• Society: Shareholder capitalism is driving inequality. There is growing evidence that attempts to align executive pay with shareholder value are largely responsible for the ballooning of salaries at the top. The prioritisation of shareholder interests has also contributed to a dramatic decline in UK wages relative to profits, helping to explain the failure of ordinary people’s living standards to rise in line with economic growth.
• Environment: Shareholder capitalism helps to drive environmental destruction. It does this by driving risky shortterm behaviour, such as fossil fuel extraction, which ignores long-term environmental risks.
The idea that shareholder capitalism is the most efficient way to mobilise large amounts of capital is no longer tenable.
We need both to create new models of companies, and implement new ways of organising investment that are fit for building an inclusive, equal, and sustainable economy.
Companies should be explicitly accountable to a mission and a set of interests beyond shareholder returns. Equally, investment must provide long-term capital for socially and environmentally useful projects, and damaging forms of speculation must be restricted.
For most people, our economy simply is not working, and the damaging aspects of shareholder capitalism are at least in part responsible. Reforming shareholder capitalism must not be dismissed as too difficult – the crisis is too urgent for that. We can take the first steps towards a better economic model right now. It’s time to act.
A Crash Course in Dupont Financial Ratio Analysis
What happens when economic growth slows ?
What happens when profit margins decline ?
What happens when Sales growth is limited ?
What does lead to Mergers and Acquisitions ?
What is the impact of Cost of Capital ?
What is EVA (Economic Value Added) ?
What is impact of Outsourcing/Offshoring on Financial Ratios ?
What is impact of Mergers and Acquisitions on Financial Ratios ?
What is impact of Stock Buy Backs on Financial Ratios ?
What is impact of Dividends on Financial Ratios ?
ROS (Return on Sales)
ROE (Return on Equities)
ROA (Return on Assets)
ROIC (Return on Invested Capital)
EVA (Economic Value Added)
MVA (Market Value Added)
From The DuPont Equation, ROE, ROA, and Growth
The DuPont Equation
The DuPont equation is an expression which breaks return on equity down into three parts: profit margin, asset turnover, and leverage.
Explain why splitting the return on equity calculation into its component parts may be helpful to an analyst
By splitting ROE into three parts, companies can more easily understand changes in their returns on equity over time.
As profit margin increases, every sale will bring more money to a company’s bottom line, resulting in a higher overall return on equity.
As asset turnover increases, a company will generate more sales per asset owned, resulting in a higher overall return on equity.
Increased financial leverage will also lead to an increase in return on equity, since using more debt financing brings on higher interest payments, which are tax deductible.
competitive advantage: something that places a company or a person above the competition
The DuPont Equation
The DuPont equation is an expression which breaks return on equity down into three parts. The name comes from the DuPont Corporation, which created and implemented this formula into their business operations in the 1920s. This formula is known by many other names, including DuPont analysis, DuPont identity, the DuPont model, the DuPont method, or the strategic profit model.
The DuPont Equation: In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by financial leverage.
Under DuPont analysis, return on equity is equal to the profit margin multiplied by asset turnover multiplied by financial leverage. By splitting ROE (return on equity) into three parts, companies can more easily understand changes in their ROE over time.
Components of the DuPont Equation: Profit Margin
Profit margin is a measure of profitability. It is an indicator of a company’s pricing strategies and how well the company controls costs. Profit margin is calculated by finding the net profit as a percentage of the total revenue. As one feature of the DuPont equation, if the profit margin of a company increases, every sale will bring more money to a company’s bottom line, resulting in a higher overall return on equity.
Components of the DuPont Equation: Asset Turnover
Asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate sales revenue or sales income for the company. Companies with low profit margins tend to have high asset turnover, while those with high profit margins tend to have low asset turnover. Similar to profit margin, if asset turnover increases, a company will generate more sales per asset owned, once again resulting in a higher overall return on equity.
Components of the DuPont Equation: Financial Leverage
Financial leverage refers to the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes. As was the case with asset turnover and profit margin, Increased financial leverage will also lead to an increase in return on equity. This is because the increased use of debt as financing will cause a company to have higher interest payments, which are tax deductible. Because dividend payments are not tax deductible, maintaining a high proportion of debt in a company’s capital structure leads to a higher return on equity.
The DuPont Equation in Relation to Industries
The DuPont equation is less useful for some industries, that do not use certain concepts or for which the concepts are less meaningful. On the other hand, some industries may rely on a single factor of the DuPont equation more than others. Thus, the equation allows analysts to determine which of the factors is dominant in relation to a company’s return on equity. For example, certain types of high turnover industries, such as retail stores, may have very low profit margins on sales and relatively low financial leverage. In industries such as these, the measure of asset turnover is much more important.
High margin industries, on the other hand, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin. For high end fashion and other luxury brands, increasing sales without sacrificing margin may be critical. Finally, some industries, such as those in the financial sector, chiefly rely on high leverage to generate an acceptable return on equity. While a high level of leverage could be seen as too risky from some perspectives, DuPont analysis enables third parties to compare that leverage with other financial elements that can determine a company’s return on equity.
ROE and Potential Limitations
Return on equity measures the rate of return on the ownership interest of a business and is irrelevant if earnings are not reinvested or distributed.
Calculate a company’s return on equity
Return on equity is an indication of how well a company uses investment funds to generate earnings growth.
Returns on equity between 15% and 20% are generally considered to be acceptable.
Return on equity is equal to net income (after preferred stock dividends but before common stock dividends) divided by total shareholder equity (excluding preferred shares ).
Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity.
fundamental analysis: An analysis of a business with the goal of financial projections in terms of income statement, financial statements and health, management and competitive advantages, and competitors and markets.
Return On Equity
Return on equity (ROE) measures the rate of return on the ownership interest or shareholders’ equity of the common stock owners. It is a measure of a company’s efficiency at generating profits using the shareholders’ stake of equity in the business. In other words, return on equity is an indication of how well a company uses investment funds to generate earnings growth. It is also commonly used as a target for executive compensation, since ratios such as ROE tend to give management an incentive to perform better. Returns on equity between 15% and 20% are generally considered to be acceptable.
Return on equity is equal to net income, after preferred stock dividends but before common stock dividends, divided by total shareholder equity and excluding preferred shares.
Return On Equity: ROE is equal to after-tax net income divided by total shareholder equity.
Expressed as a percentage, return on equity is best used to compare companies in the same industry. The decomposition of return on equity into its various factors presents various ratios useful to companies in fundamental analysis.
ROE Broken Down: This is an expression of return on equity decomposed into its various factors.
The practice of decomposing return on equity is sometimes referred to as the “DuPont System. ”
Potential Limitations of ROE
Just because a high return on equity is calculated does not mean that a company will see immediate benefits. Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity. Earnings per share is the amount of earnings per each outstanding share of a company’s stock. EPS is equal to profit divided by the weighted average of common shares.
Earnings Per Share: EPS is equal to profit divided by the weighted average of common shares.
The true benefit of a high return on equity comes from a company’s earnings being reinvested into the business or distributed as a dividend. In fact, return on equity is presumably irrelevant if earnings are not reinvested or distributed.
Assessing Internal Growth and Sustainability
Sustainable– as opposed to internal– growth gives a company a better idea of its growth rate while keeping in line with financial policy.
Calculate a company’s internal growth and sustainability ratios
The internal growth rate is a formula for calculating the maximum growth rate a firm can achieve without resorting to external financing.
Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy.
Another measure of growth, the optimal growth rate, assesses sustainable growth from a total shareholder return creation and profitability perspective, independent of a given financial strategy.
retention: The act of retaining; something retained
retention ratio: retained earnings divided by net income
sustainable growth rate: the optimal growth from a financial perspective assuming a given strategy with clear defined financial frame conditions/ limitations
Internal Growth and Sustainability
The true benefit of a high return on equity arises when retained earnings are reinvested into the company’s operations. Such reinvestment should, in turn, lead to a high rate of growth for the company. The internal growth rate is a formula for calculating maximum growth rate that a firm can achieve without resorting to external financing. It’s essentially the growth that a firm can supply by reinvesting its earnings. This can be described as (retained earnings)/(total assets ), or conceptually as the total amount of internal capital available compared to the current size of the organization.
We find the internal growth rate by dividing net income by the amount of total assets (or finding return on assets ) and subtracting the rate of earnings retention. However, growth is not necessarily favorable. Expansion may strain managers’ capacity to monitor and handle the company’s operations. Therefore, a more commonly used measure is the sustainable growth rate.
Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy, such as target debt to equity ratio, target dividend payout ratio, target profit margin, or target ratio of total assets to net sales.
We find the sustainable growth rate by dividing net income by shareholder equity (or finding return on equity) and subtracting the rate of earnings retention. While the internal growth rate assumes no financing, the sustainable growth rate assumes you will make some use of outside financing that will be consistent with whatever financial policy being followed. In fact, in order to achieve a higher growth rate, the company would have to invest more equity capital, increase its financial leverage, or increase the target profit margin.
Optimal Growth Rate
Another measure of growth, the optimal growth rate, assesses sustainable growth from a total shareholder return creation and profitability perspective, independent of a given financial strategy. The concept of optimal growth rate was originally studied by Martin Handschuh, Hannes Lösch, and Björn Heyden. Their study was based on assessments on the performance of more than 3,500 stock-listed companies with an initial revenue of greater than 250 million Euro globally, across industries, over a period of 12 years from 1997 to 2009.
Due to the span of time included in the study, the authors considered their findings to be, for the most part, independent of specific economic cycles. The study found that return on assets, return on sales and return on equity do in fact rise with increasing revenue growth of between 10% to 25%, and then fall with further increasing revenue growth rates. Furthermore, the authors attributed this profitability increase to the following facts:
Companies with substantial profitability have the opportunity to invest more in additional growth, and
Substantial growth may be a driver for additional profitability, whether by attracting high performing young professionals, providing motivation for current employees, attracting better business partners, or simply leading to more self-confidence.
However, according to the study, growth rates beyond the “profitability maximum” rate could bring about circumstances that reduce overall profitability because of the efforts necessary to handle additional growth (i.e., integrating new staff, controlling quality, etc).
Dividend Payments and Earnings Retention
The dividend payout and retention ratios offer insight into how much of a firm’s profit is distributed to shareholders versus retained.
Calculate a company’s dividend payout and retention ratios
Many corporations retain a portion of their earnings and pay the remainder as a dividend.
Dividends are usually paid in the form of cash, store credits, or shares in the company.
Cash dividends are a form of investment income and are usually taxable to the recipient in the year that they are paid.
Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends.
Retained earnings can be expressed in the retention ratio.
stock split: To issue a higher number of new shares to replace old shares. This effectively increases the number of shares outstanding without changing the market capitalization of the company.
Dividend Payments and Earnings Retention
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. On the other hand, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. Many corporations retain a portion of their earnings and pay the remainder as a dividend.
A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. Retained earnings are shown in the shareholder equity section in the company’s balance sheet –the same as its issued share capital.
Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a “special dividend” to distinguish it from the fixed schedule dividends. Dividends are usually paid in the form of cash, store credits (common among retail consumers’ cooperatives), or shares in the company (either newly created shares or existing shares bought in the market). Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder.
Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is $0.50 per share, the holder of the stock will be paid $50. Dividends paid are not classified as an expense but rather a deduction of retained earnings. Dividends paid do not show up on an income statement but do appear on the balance sheet.
Stock dividends are those paid out in the form of additional stock shares of the issuing corporation or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield five extra shares). If the payment involves the issue of new shares, it is similar to a stock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.
Dividend Payout and Retention Ratios
Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
The part of the earnings not paid to investors is left for investment to provide for future earnings growth. These retained earnings can be expressed in the retention ratio. Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.
Dividend Payout Ratio: The dividend payout ratio is equal to dividend payments divided by net income for the same period.
Relationships between ROA, ROE, and Growth
Return on assets is a component of return on equity, both of which can be used to calculate a company’s rate of growth.
Discuss the different uses of the Return on Assets and Return on Assets ratios
Return on equity measures the rate of return on the shareholders ‘ equity of common stockholders.
Return on assets shows how profitable a company’s assets are in generating revenue.
In other words, return on assets makes up two-thirds of the DuPont equation measuring return on equity.
Capital intensity is the term for the amount of fixed or real capital present in relation to other factors of production. Rising capital intensity pushes up the productivity of labor.
return on common stockholders’ equity: a fiscal year’s net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage
quantitatively: With respect to quantity rather than quality.
Return On Assets Versus Return On Equity
In review, return on equity measures the rate of return on the ownership interest (shareholders’ equity) of common stockholders. Therefore, it shows how well a company uses investment funds to generate earnings growth. Return on assets shows how profitable a company’s assets are in generating revenue. Return on assets is equal to net income divided by total assets.
Return On Assets: Return on assets is equal to net income divided by total assets.
This percentage shows what the company can do with what it has (i.e., how many dollars of earnings they derive from each dollar of assets they control). This is in contrast to return on equity, which measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. Return on assets is, however, a vital component of return on equity, being an indicator of how profitable a company is before leverage is considered. In other words, return on assets makes up two-thirds of the DuPont equation measuring return on equity.
ROA, ROE, and Growth
In terms of growth rates, we use the value known as return on assets to determine a company’s internal growth rate. This is the maximum growth rate a firm can achieve without resorting to external financing. We use the value for return on equity, however, in determining a company’s sustainable growth rate, which is the maximum growth rate a firm can achieve without issuing new equity or changing its debt-to-equity ratio.
Capital Intensity and Growth
Return on assets gives us an indication of the capital intensity of the company. “Capital intensity” is the term for the amount of fixed or real capital present in relation to other factors of production, especially labor. The underlying concept here is how much output can be procured from a given input (assets!). The formula for capital intensity is below:
Capital Intensity=Total AssetsSales
The use of tools and machinery makes labor more effective, so rising capital intensity pushes up the productivity of labor. While companies that require large initial investments will generally have lower return on assets, it is possible that increased productivity will provide a higher growth rate for the company. Capital intensity can be stated quantitatively as the ratio of the total money value of capital equipment to the total potential output. However, when we adjust capital intensity for real market situations, such as the discounting of future cash flows, we find that it is not independent of the distribution of income. In other words, changes in the retention or dividend payout ratios can lead to changes in measured capital intensity.
This document was prepared by the OECD Secretariat to serve as an issues paper for the hearing on market concentration taking place at the 129th meeting of the OECD Competition Committee on 6-8 June 2018
From Ecological Macroeconomic Models: Assessing Current Developments
From A stock-flow-fund ecological macroeconomic model
From Stock-Flow Consistent Input–Output Models as a Bridge Between Post-Keynesian and Ecological Economics
One effort to explicitly represent the dynamics of debt, finance, and other monetary factors has been the post-Keynesian stock-flow consistent (SFC) approach. At the same time, input–output (IO) models have been widely used to investigate sectoral interdependencies within the real economy, while environmentally extended input–output models have been used to analyze the relationship between the economy and ecological subsystems. However, the role of monetary dynamics has been left relatively unexplored in IO models (Caiani et al., 2014). This paper proposes a synthesis of elements from both SFC and IO models with insights from ecological economics to provide an avenue for investigating the interrelations between the monetary economy and the physical environment.
From Stock-Flow Consistent Input–Output Models as a Bridge Between Post-Keynesian and Ecological Economics
By combining SFC models and IO models, financial flows of funds can be integrated with flows of real goods and services. Lawrence Klein, who developed large scale macroeconomic models typified by the FRB-MIT-Penn model, has noted the natural synergies between the National Income and Product accounts, the IO accounts, and the FF accounts (Klein, 2003). The approach of combining both SFC and IO models with ecological macroeconomics affords one method to unite those accounts, as suggested by Klein, and to simultaneously model monetary flows through the financial system, flows of produced goods and services through the real economy, and flows of physical materials through the natural environment. Models of this type may provide additional tools to aid macro economists, ecological economists, and physicists in the task of understanding the economy and the physical environment as one united and complexly interrelated system, rather than as a colloidal agglomeration of artificially separated analytical domains. These modes of analysis are required to study pressing problems such as climate change, which are neither purely economic, nor purely environmental, nor purely physical, but rather are all of the above (Rezai et al., 2013).
Measuring Globalization: Global Multi Region Input Output Data Bases (G-MRIO)
A special issue of Economic Systems Research published in 2013 discussed currently available GMRIO data bases. There are two strands of research in development and use of these databases:
Trade flows and global supply chains
Environmental Impacts of Economic Growth, Trade and Globalization
IDE JETRO Asian IO Tables
OECD Inter-Country Input-Output (ICIO) tables
GRAM (Global Resource Accounting Model )
World Input-Output Database (WIOD).
Global Trade Analysis Project (GTAP)
Another recent development is development of Trade in Value added databases analyzing trade flows of intermediate goods and fragmented global supply chains and production networks. These projects are currently underway at the time of writing of this post.
NA TiVA Project
The OECD-WTO TiVA database
APEC TiVA initiative
There are also EE- GMRIO (Environmentally extended GMRIO) discussed else where in a related post.
The Global Resource Accounting Model (GRAM) is a multi-regional input-output model (MRIO), which currently distinguishes between 62 countries and one ‘rest of the world’ region and 48 industrial sectors per country or region. The heart of the model is made up of OECD data on bilateral trade flows and input-output tables for 1995 to 2010. Combined with additional data sets, such as CO2 emissions and material extraction, the model enables production-related variables to be attributed to end consumption.
GLOBAL MULTIREGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK
Arnold Tukker & Erik Dietzenbacher
Published online: 21 Mar 2013
This review is the introduction to a special issue of Economic Systems Research on the topic of global multi regional input–output (GMRIO) tables, models, and analysis. It provides a short historical context of GMRIO development and its applications (many of which deal with environmental extensions) and presents the rationale for the major database projects presented in this special issue. Then the six papers are briefly introduced. This is followed by a concluding comparison of the characteristics of the main GMRIO databases developed thus far and an outlook of potential further developments.
COMPILATION AND APPLICATIONS OF IDE-JETRO’S INTERNATIONAL INPUT–OUTPUT TABLES
Bo Meng , Yaxiong Zhang & Satoshi Inomata
Published online: 21 Mar 2013
International input–output (IO) tables are among the most useful tools for economic analysis. Since these tables provide detailed information about international production networks, they have recently attracted considerable attention in research on spatial economics, global value chains, and issues relating to trade in value added. The Institute of Developing Economies at the Japan External Trade Organization (IDE-JETRO) has more than 40 years of experience in the construction and analysis of international IO tables. This paper explains the development of IDE-JETRO’s multi-regional IO projects including the construction of the Asian International Input–Output table and the Transnational Inter regional Input–Output table between China and Japan. To help users understand the features of the tables, this paper also gives examples of their application.
EXIOPOL – DEVELOPMENT AND ILLUSTRATIVE ANALYSES OF A DETAILED GLOBAL MR EE SUT/IOT
Arnold Tukker , Arjan de Koning , Richard Wood , Troy Hawkins , Stephan Lutter , Jose
Published online: 21 Mar 2013
EXIOPOL (A New Environmental Accounting Framework Using Externality Data and Input–Output Tools for Policy Analysis) was a European Union (EU)-funded project creating a detailed, global, multi regional environmentally extended Supply and Use table (MR EE SUT) of 43 countries, 129 sectors, 80 resources, and 40 emissions. We sourced primary SUT and input–output tables from Eurostat and non-EU statistical offices. We harmonized and detailed them using auxiliary national accounts data and co-efficient matrices. Imports were allocated to countries of exports using United Nations Commodity Trade Statistics Database trade shares. Optimization procedures removed imbalances in these detailing and trade linking steps. Environmental extensions were added from various sources. We calculated the EU footprint of final consumption with resulting MR EE SUT. EU policies focus mainly on energy and carbon footprints. We show that the EU land, water, and material footprint abroad is much more relevant, and should be prioritized in the EU’s environmental product and trade policies.
A MULTI-REGION INPUT–OUTPUT TABLE BASED ON THE GLOBAL TRADE ANALYSIS PROJECT DATABASE (GTAP-MRIO)
Robbie M. Andrew & Glen P. Peters
Published online: 21 Mar 2013
Understanding the drivers of many environmental problems requires enumerating the global supply chain. Multi-region input–output analysis (MRIOA) is a well-established technique for this purpose, but constructing a multi-region input–output table (MRIOT) can be a formidable challenge. We constructed a large MRIOT using the Global Trade Analysis Project (GTAP) database of harmonised economic, IO, and trade data. We discuss the historical development of the GTAP-MRIO and describe its efficient construction. We provide updated carbon footprint estimates and analyse several issues relevant for MRIO construction and applications. We demonstrate that differences in environmental satellite accounts may be more important than differences in MRIOTs when calculating national carbon footprints. The GTAP-MRIO is a robust global MRIOT and, given its easy availability and implementation, it should allow the widespread application of global MRIOA by a variety of users.
THE CONSTRUCTION OF WORLD INPUT–OUTPUT TABLES IN THE WIOD PROJECT
Erik Dietzenbacher , Bart Los , Robert Stehrer , Marcel Timmer & Gaaitzen de Vries
Published online: 21 Mar 2013
This article describes the construction of the World Input–Output Tables (WIOTs) that constitute the core of the World Input–Output Database. WIOTs are available for the period 1995–2009 and give the values of transactions among 35 industries in 40 countries plus the ‘Rest of the World’ and from these industries to households, governments and users of capital goods in the same set of countries. The article describes how information from the National Accounts, Supply and Use Tables and International Trade Statistics have been harmonized, reconciled and used for estimation procedures to arrive at a consistent time series of WIOTs.
BUILDING EORA: A GLOBAL MULTI-REGION INPUT–OUTPUT DATABASE AT HIGH COUNTRY AND SECTOR RESOLUTION
Manfred Lenzen , Daniel Moran , Keiichiro Kanemoto & Arne Geschke
Published online: 21 Mar 2013
There are a number of initiatives aimed at compiling large-scale global multi-region input–output (MRIO) tables complemented with non-monetary information such as on resource flows and environmental burdens. Depending on purpose or application, MRIO construction and usage has been hampered by a lack of geographical and sectoral detail; at the time of writing, the most advanced initiatives opt for a breakdown into at most 129 regions and 120 sectors. Not all existing global MRIO frameworks feature continuous time series, margins and tax sheets, and information on reliability and uncertainty. Despite these potential limitations, constructing a large MRIO requires significant manual labour and many years of time. This paper describes the results from a project aimed at creating an MRIO account that represents all countries at a detailed sectoral level, allows continuous updating, provides information on data reliability, contains table sheets expressed in basic prices as well as all margins and taxes, and contains a historical time series. We achieve these goals through a high level of procedural standardisation, automation, and data organisation.
POLICY-RELEVANT APPLICATIONS OF ENVIRONMENTALLY EXTENDED MRIO DATABASES – EXPERIENCES FROM THE UK
Thomas Wiedmann & John Barrett
Published online: 21 Mar 2013
The impressive development in global multi-region input–output (IO) databases is accompanied by an increase in applications published in the scientific literature. However, it is not obvious whether the insights gained from these studies have indeed been used in political decision-making. We ask whether and to what extent there is policy uptake of results from environmentally extended multi-region IO (EE-MRIO) models and how it may be improved. We identify unique characteristics of such models not inherent to other approaches. We then present evidence from the UK showing that a policy process around consumption-based accounting for greenhouse gas emissions and resource use has evolved that is based on results from EE-MRIO modelling. This suggests that specific, policy-relevant information that would be impossible to obtain otherwise can be generated with the help of EE-MRIO models. Our analysis is limited to environmental applications of global MRIO models and to government policies in the UK.
From GLOBAL MULTIREGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK
From POLICY-RELEVANT APPLICATIONS OF ENVIRONMENTALLY EXTENDED MRIO DATABASES – EXPERIENCES FROM THE UK
From Economic Systems Research
Volume 26, 2014 – Issue 3: A Comparative Evaluation of Multi-Regional Input-Output Databases
CONVERGENCE BETWEEN THE EORA, WIOD, EXIOBASE, AND OPENEU’S CONSUMPTION-BASED CARBON ACCOUNTS
Daniel Moran & Richard Wood
Published online: 14 Jul 2014
In this paper, we take an overview of several of the biggest independently constructed global multi-regional input–output (MRIO) databases and ask how reliable and consonant these databases are. The key question is whether MRIO accounts are robust enough for setting environmental policies. This paper compares the results of four global MRIOs: Eora, WIOD, EXIOBASE, and the GTAP-based OpenEU databases, and investigates how much each diverges from the multi-model mean. We also use Monte Carlo analysis to conduct sensitivity analysis of the robustness of each accounts’ results and we test to see how much variation in the environmental satellite account, rather than the economic structure itself, causes divergence in results. After harmonising the satellite account, we found that carbon footprint results for most major economies disagree by<10% between MRIOs. Confidence estimates are necessary if MRIO methods and consumption-based accounting are to be used in environmental policy-making at the national level.
COMPARATIVE EVALUATION OF MRIO DATABASES
Satoshi Inomata & Anne Owen
Published online: 11 Aug 2014
This editorial is the introduction to a special issue of Economics Systems Research on the topic of intercomparison of multi-regional input–output (MRIO) databases and analyses. It explains the rationale for dedicating an issue of this journal to this area of research. Then the six papers chosen for this issue are introduced. This is followed by a concluding section outlining future directions for developers and users of MRIO databases.
The World Input‐Output Database (WIOD): Contents, Sources and Methods
Edited by Marcel Timmer (University of Groningen)
With contributions from:
Abdul A. Erumban, Reitze Gouma, Bart Los, Umed Temurshoev and
Gaaitzen J. de Vries (University of Groningen)
Iñaki Arto, Valeria Andreoni Aurélien Genty, Frederik Neuwahl, José
M. Rueda‐Cantuche and Alejandro Villanueva (IPTS)
Joe Francois, Olga Pindyuk, Johannes Pöschl and Robert Stehrer
(WIIW), Gerhard Streicher (WIFO)
Manfred Lenzen, Arne Geschke, Muhammad Daaniyall Abd Rahman, Yanyan
Xiao, Jacob Fry, Rachel Reyes, Erik Dietzenbacher, Satoshi Inomata, Keiichiro Kanemoto, Bart Los, Daniel Moran, Hagen Schulte in den Bäumen, Arnold Tukker, Terrie Walmsley, Thomas Wiedmann, Richard Wood & Norihiko Yamano
Credit Terms in a Supplier Buyer contracts determine payment delays which accumulate in current accounts of a Firm.
Bank to Bank
Bank to Firm
Firm to Firm
Dyad of Credit Relations
Supplier – Buyer
Triad of Credit Relations
Supplier – Bank – Buyer
Sources of Systemic Risk
Failure of a Firm and its impact on Suppliers and Customers (Flow of Goods)
Failure of a Bank and its impact on Trade Credit
Credit Contraction due to de-risking by the Banks
Decline in Correspondent Banking relations and its impact on Trade Finance
From Credit Chains and Sectoral Co-movement: Does the Use of Trade Credit Amplify Sectoral Shocks?
Trade credit is an important source of short-term financing for firms, not only in the U.S., as documented by Petersen and Rajan (1997), but also around the World. For instance, accounts payables are larger than short-term debt in 60 percent of the countries covered by Worldscope. Also, across the world most firms simultaneously receive credit from their suppliers and grant it to their customers, which tend to be concentrated on specific sectors. These characteristics of trade credit financing have led some authors to propose it as a mechanism for the propagation and amplification of idiosyncratic shocks. The intuition behind the mechanism is straightforward; a firm that faces a default by its customers may run into liquidity problems that force it to default to its own suppliers. Therefore, in a network of firms that borrow from each other, a temporary shock to the liquidity of some firms may cause a chain reaction in which other firms also get in financial difficulties, thus resulting in a large and persistent decline in aggregate activity. This idea was first formalized by Kiyotaki and Moore (1997) in a partial equilibrium setting, and has been recently extended to a general equilibrium environment by Cardoso-Lecourtois (2004), and Boissay (2006) who have also provided evidence of the potential quantitative importance of the mechanism by calibrating their models to the cases of Mexico and the U.S., respectively.
From Ontology of Bankruptcy Diffusion through Trade Credit Channel
A supply network is a network of entities interacting to transform raw material into finished product for customers. Since interdependencies among supply network members on material, information, and finance are becoming increasingly intensive, financial status of one firm not only depends on its own management, but also on the performance and behaviours of other members. Therefore, understanding the financial flows variability and the material interactions is a key to quantify the risk of a firm. Due to the complex structure and dynamic interactions of modern supply networks, there are some difficulties faced by pure analysis approaches in analyzing financial status of the supply network members and the high degree of nonlinear interactions between them. Mathematical and operation research models usually do not function very well for this kind of financial decision making. These models always start with many assumptions and have difficulties modeling such complex systems that include many entities, relationships, features, parameters, and constraints. In addition, traditional modeling and analysis tools lack the ability to predict the impact of a specific event on the performance of the entire supply network. Current financial data analysis with large volumes of structure data cannot offer the full picture and intrinsic insights into the risk nature of a company. Motivated by the literature gap in risk monitoring in investment background and limitations of analysis approaches for handling bankruptcy contagion phenomenon, we propose an ontological approach to present a formal, shared conceptualization of this domain knowledge.
From Inter-Firm Trade Finance in Times of Crisis
The severe recession that is hitting the global economy, with very low or even negative growth rates, has caused widespread contractions in international trade, both in developed and developing countries. World Trade Organization (WTO) has forecast that exports will decline by roughly 9% in volume terms in 2009 due to the collapse in global demand brought on by the biggest economic downturn in decades. The contraction in developed countries will be particularly severe with exports falling by 10%. In developing countries, which account for one-third of world trade, exports will shrink by some 2% to 3% in 2009.
The contraction in international trade has been accompanied by a sharp decline in the availability of trade finance. This decline is only partly explained by the contraction in demand: according to a BAFT (Banker’s Association for Trade and Finance) and International Monetary Fund (IMF) joint survey (2009), flows of trade finance to developed countries have fallen by 6% relative to the previous year, more than the reduction in trade flows, suggesting that part of the fall reflects a disruption of financial intermediation. The contraction in value of trade finance has also been accompanied by a sharp increase in its price. Fear that the decline in trade finance and the increase in its cost would accelerate the slowdown of world trade has triggered a number of government initiatives in support of trade finance (Chauffour and Farole,2009).
The situation is especially worrisome for firms operating in developing countries which rely heavily on trade finance to support both their exports and imports.1 With a restricted access to financing and an increased cost of financing, these firms may find difficulties in maintaining their production and trade activities.
There have been several developments in economics in last 20 years. Although these have been developed by different groups of economists, there are common relations among all of them. Because of Institutional silos, many of these developments are not shared. My attempt is to compile them here in this post and other previous related posts.
IMF Balance Sheet Approach (BSA) – From-Who-To-Whom
Balance Sheet Economics/Asset Liability Matrices (ALM) of Tsujimura
Financial Input-Output Analysis (F-IO Tables)
F-SAM ( Financial Social Accounting Matrix)
Interrelated Balance Sheet Approach of Perry Mehrling and Zoltan Pozsar
Stock Flow Consistent Modeling – Marc Lavoie, G Zezza, W Godley
Extended Supply and Use Tables (E-SUT)/UN SEIGA Initiative
Supply Chain Finance/Financial Supply Chain Management/Operations and Finance
Trade Finance/Global Value Chains/Accounting for Global Value Chains
Integrated Macroeconomic Accounts – NIPAs and Financial Accounts
From Balance Sheets, Transaction Matrices and the Monetary Circuit
Chapter 2 of book Monetary Economics by M Lavoie and W Godley 2007
The lack of integration between the flows of the real economy and its financial side greatly annoyed a few economists, such as Denizet and Copeland. For Denizet, J.M. Keynes’s major contribution was his questioning of the classical dichotomy between the real and the monetary sides of the economy. The post-Keynesian approach, which prolongs Keynes’s contribution on this, underlines the need for integration between financial and income accounting, and thus constitutes a radical departure from the mainstream. 1
Denizet found paradoxical that standard national accounting, as was initially developed by Richard Stone, reproduced the very dichotomy that Keynes had himself attempted to destroy. This was surprising because Stone was a good friend of Keynes, having provided him with the national accounts data that Keynes needed to make his forecasts and recommendations to the British Treasury during the Second World War, but of course it reflected the initial difficulties in gathering enough good financial data, as Stone himself later got involved in setting up a proper framework for financial flows and balance sheet data (Stone 1966).2
In trade relations, if goods flow from X to Y, then Money (Payments) flows from Y to X.
Intra Firm amd Inter Firm relations between Accounts Receivables and Accounts Payable
UNITED NATIONS STATISTICS DIVISION SEIGA Initiative
Under System of Extended International and Global Accounts (SEIGA) Initiative
United Nations is developing:
UN Handbook on Accounting for Global Value Chains
Presentation from 2017 Seminar on Accounting for Global Value Chains
From Financial input-output multipliers
From Sectoral interlinkages in balance sheet approach