Modelling of demand shock impact in food sector on sectoral development: Case of Latvia

In order to promptly model the cross-sectoral impact of the market crisis (macro-level impact in the narrow sense) that primarily has a direct impact on agriculture and food production, but due to the cross-sectoral linkages, the full impact also includes the impact on other sectors and the overall impact on the economy (macro level in the broadest sense), the input-output modelling tool is used. Two scenarios have been modelled: the effect of external shocks on the demand for products from the agricultural and food production sectors. Latvian farmers, producers and consumers are mostly price takers, therefore the changes in the global price level largely determine the price level in the domestic market. The modelling of the first scenario which involves a decline of food industry exports by 40%, assuming that household consumption remains at its previous level and is not initially affected and replaced by cheaper imported food industry goods, results in the net final consumption expenditures on food products decrease by 30.1%, resulting in a 25.1% drop in food industry output, also affecting the output of agriculture (−8.3%) and fishing (−10.9%). The impact on other sectors is relatively minor. The total net final consumption declined by 1.8%, but the domestic output −2.5%. Modelling the second shock scenario with two sub-scenarios the product market is experiencing a shock and export demand is declining by 50%. Modelling results show that agriculture itself has the most significant impact due to a decrease in the net final consumption expenditure by 44.2%, while agricultural output by 28.1%. The food production output declined by 0.8%, the total output — by 1.9%, and the total value-added — by 1.4%. The use of the input-output approach is directly linked to the available data on agricultural subsectors and their linkage with all other sectors of the economy.