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Supply, demand and consumption

Demand shifters affect the overall demand function or schedule, rather than indicating a specific quantity that will potentially be consumed under different prevailing conditions. Growth of personal income shifts or increases demand as a functional relationship (to price) or schedule. Consumption will be simultaneously determined through interaction with supply (also a functional relationship with price) as it is also changing over time in response to supply shifters. Obviously, the quantity of timber consumed represents both what is demanded and what is supplied at a prevailing price under current or projected conditions.

This distinction, while relatively easy to define, greatly complicates the identification of supply and demand as normally embodied in the analysis of forestry sector activities and outlook As is clearly noted in the ADB (1995, Chapter 16) discussion of the "Gap Model" outlook projections, this methodological approach fails to capture the essence of supply and demand as a market phenomena.

The extension of conventional supply and demand estimation as separable processes or as 'point' estimates of quantity is the utilization of integrated equilibrium models which simultaneously estimate conditional consumption quantities that represent the quantity supplied and the quantity demanded (not 'supply' and 'demand') at a specified price level.

While there are potentially a large number of equilibrium models or estimation procedures for the forestry sector, the major literature reviewed in this study involves the application of two major efforts. The ITTO sponsored study (1993, 1995) "Analysis of Macroeconomic Trends in the Supply and Demand of Sustainably Produced Tropical Timber from the Asia-Pacific Region" involved the development of the linked "Log Supply Model and the Asia Pacific Tropical Timber Trade Model". In a similar manner, the studies commissioned by ITTO (1993) "The Economic Linkages between the International Trade in Tropical Timber and the Sustainable Management of Tropical Forests", and the World Bank (1993) "Tropical Deforestation in Asia and the Market for Wood" incorporate applications of the CINTRAFOR Global Trade Model (CGTM). Both models utilize similar approaches for estimating equilibrium conditions for multiple products is spatially separated markets. Differential supply and demand regions are linked through trade, thus explicitly balancing not only country markets but also the multiple markets of the region as a whole.

It was not feasible to compare or contrast the structural components of these two models and their underlying assumptions within the scope of the present study. Each model is highly complex, involving numerous econometric specifications for individual countries and products. Database requirements are extensive to quantitatively estimate the models. Forecasts require the projection or independent estimation of the relevant 'drivers' for both supply and demand for future periods. Under the stated conditions, simulations of probable responses to the major determinants is possible. Hence alternative scenarios have been developed by these studies illustrating the likely range of outcomes under the assumed conditions.

Many questions can be raised regarding the structure and estimation of models, including the spatial equilibrium models discussed above. Specification of regions, and the inclusive countries, is largely a matter of practical ability to desegregate information and to formulate future estimates of the model parameters. Estimation of the underlying economic relationships is critical to model results. Linkages between consumers and producers, including the "rest of the world" primarily through transportation costs (leading to lowest cost transactions and trade flows) can be questioned. It is understandably impossible to fully capture the complexity or detail of the 'real world'. Nevertheless, the application of such an integrated and spatially balanced analysis forces recognition of the interdependencies of supply and demand, and the complex web of interactions beyond any individual country.

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