Structural decomposition analysis of Latvian agrifood sector as integral part of global market

Abstract

Research background: the Latvian agrifood sector is continuously becoming more integrated in global markets. Imports and exports of agricultural commodities grow every year. At the same time, changes in output from agriculture and food processing are moderate. The main factors that can be used to characterize these sectors are employment, gross value added and income. The main causes of the changes of these three factors could be estimated by structural decomposition analysis. Purpose of the article: the objective of the research is the decomposition of the percentage changes over time in employment, gross value added and income in Latvian economy by their source: changes in intensities per unit of output, changes in the intermediate consumption and changes in the final demand structure. Methods: the traditional methods of the Input-Output framework, such as multipliers, elasticities, causative matrices enable the estimation of structural trends in economy sectors. However, they do not provide the share in the total impact of various factors on the changes in the economy. Structural decomposition analysis estimates the relative size of the impact of these factors within the total impact. Findings & Value added: the research results show rather large positive impact of final demand factor on employment, gross value added and income changes in both sectors. The impact of the intensities (reverse factor productivities), in turn, is large and negative. The impact of the intermediate demand is less marked. As the growth in final demand can be attributed solely to increase in export demand, this combined with the growth in labor productivity are the main drivers of employment changes in agriculture. The method can be effectively applied to other variables of interest for which the calculated intensities per unit of output make sense, such as carbon emissions, greenhouse gas emissions or energy input.