Title:	Principles, structure and application of dynamic regional sector model of Finnish agriculture
Author:	Heikki Lehtonen MTT Economic Research P.O. Box 3, FIN-00411 Helsinki, Finland heikki.lehtonen@mtt.fi
Date:	October 2001
Status:	MTT Economic Research, Publications 98, 2001. 265 p.
Abstract:	This study presents a dynamic regional sector model for Finnish agriculture (DREMFIA) to be used in evaluating the effects of different agricultural policies on production and agricultural income in Finland. Recursive programming has been used in simulating annual market reactions and economic adjustments. A process of adjustments in dis-equilibrium is assumed. The theoretical basis of the chosen modelling methodology is presented. Two versions of the model were presented. The base model assumes exogenous efficiency development, i.e. labour and capital inputs needed per hectare and animal, in agriculture. Using the base model one may analyse the levels of production and income at different levels of efficiency development. The technology diffusion model used in the extended version models the change in capital invested in alternative production techniques. The change in capital is affected by the profitability of each technique, as well as the relative spread of each technique, i.e. commonly used techniques are more accessible to farmers. It is found that Agenda 2000 results in larger grain areas and farm income in medium term, but in lower milk and beef production volumes in the long term compared to the base scenario. Also farm income will slightly decrease due to the Agenda 2000 dairy reform starting at 2005. It is also found that the long term effects of Agenda 2000 on milk production are larger if the endogenous investments are taken into account in the analysis.
Index words:	Agricultural sector model, policy analysis, Recursive Programming, technology diffusion, Armington assumption