THE ESTIMATION OF PRICE EFFECTS IN A SOCIAL ACCOUNTING MATRIX

Abstract

The estimation of true basic prices in a Social Accounting Matrix (SAM) has long been recognized as necessary in order to achieve uniform valuation of inputs for meaningful manipulation of the input‐output table contained in a SAM, in order to assess the real effects of changes in demand, etc. In practice, approximate basic prices only have normally been calculated in order to avoid matrix inversion among other things. It is equally the case that true basic prices are required if one wishes to assess the price‐raising effects of commodity taxes. It is shown through an example that approximate basic prices, as conventionally calculated, are inadequate and potentially misleading for this as indeed they are for achieving uniformity of valuation. There are also problems with the present procedure for calculating true basic prices.An alternative method of calculating true basic prices is given, which has various advantages over the existing method, and a new approximate method is also derived which appears to represent a definite improvement on the present method. For the main purpose of the paper, however, the prices of concern are those charged by producers to which the methodology equally applies.