Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки
This paper examines the importance and dynamics of prices in a small open economy in transition. Several main features of this process outline the behavior of the mathematical model. The model examines four factors that affect prices after the liberalization of the domestic market: the domestic prod...
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The National Technical University of Ukraine "Igor Sikorsky Kyiv Polytechnic Institute"
2010
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System research and information technologies| _version_ | 1867334295452909568 |
|---|---|
| author | Oganesyan, Gayane |
| author_facet | Oganesyan, Gayane |
| author_institution_txt_mv | [
{
"author": "Gayane Oganesyan",
"institution": null
}
] |
| author_sort | Oganesyan, Gayane |
| baseUrl_str | http://journal.iasa.kpi.ua/oai |
| collection | OJS |
| datestamp_date | 2018-04-06T12:28:40Z |
| description | This paper examines the importance and dynamics of prices in a small open economy in transition. Several main features of this process outline the behavior of the mathematical model. The model examines four factors that affect prices after the liberalization of the domestic market: the domestic producer price, the cost price of inefficiency, the hyperinflation price, and the world market price, which includes the dynamics of the exchange rate. The numeric simulation of the price dynamics for the cheese segment of Ukrainian food market was made. |
| first_indexed | 2025-07-17T10:21:50Z |
| format | Article |
| fulltext |
© G. Oganesyan, 2010
122 ISSN 1681–6048 System Research & Information Technologies, 2010, № 3
UDC 339.9
PRICE FORMATION MECHANISM AND TARIFF PROTECTION
IN A DYNAMIC MODEL OF A SMALL OPEN
ECONOMY IN TRANSITION
GAYANE OGANESYAN
This paper examines the importance and dynamics of prices in a small open econ-
omy in transition. Several main features of this process outline the behavior of the
mathematical model. The model examines four factors that affect prices after the
liberalization of the domestic market: the domestic producer price, the cost price of
inefficiency, the hyperinflation price, and the world market price, which includes the
dynamics of the exchange rate. The numeric simulation of the price dynamics for the
cheese segment of Ukrainian food market was made.
INTRODUCTION
The problem of transition to market has occupied the attention of policy makers
and economists alike. The dynamics of the transition are multivariate and com-
plex. They are difficult to capture because, during the transition, new market insti-
tutions emerge and new social interactions and behaviors need to be learned. The
consequences of adjustment for economic agents in transition are not precisely
described by the Rational Expectations terminology. The pricing mechanism
seems to underlie the path of behavior in the initial stages of the economic trans-
formation [1].
This paper examines the importance and dynamics of prices in a small open
economy in transition. Several main features of this process outline the behavior
of the model. The four factors that impact prices after the liberalization of the
domestic market include the domestic producer price, the cost price of
inefficiency, the hyperinflation price, and the world market price, which, in turn,
includes the dynamics of the exchange rate that are also considered. The flow of
information in the new economic and political environment allows economic
agents to form expectations that are not completely rational. The model’s set-up
shows the interactions between consumers, new state-owned enterprises and the
government; each contributes to price formation with available resources. For in-
stance, the consumer has real balances that help determine demand on goods and
services. The domestic producer, on the other hand, behaves as a monopolist with
little regard to market forces, while the government controls the interest rates and
tariff policies. This system of interactions defines «subjective» price expectations
that exogenously influence the emerging market institutions and foreign trade.
This specific behavior is characterized by several aspects of transition to market
economy.
The first aspect is the basic transformation of the domestic economy into a
market economy, which deals with the establishment of basic market institutions.
Price formation mechanism and tariff protection in a dynamic model of a small open economy …
Системні дослідження та інформаційні технології, 2010, № 3 123
Since centrally planned economies have been administratively governed, and de-
void of foreign influences, new rules of behavior and new institutions have come
into being in order to challenge the existing order. In this framework, government
intervention ceases to be direct, and so, more subtle ways of control begin to play
the important role. The domestic producers become exposed to import price com-
petition, and demand certain levels of protection. The consumers gain access to a
wide variety of high quality imported goods and services.
At the same time, macroeconomic stabilization proves to challenge the new
role of the government in transition. This second aspect consists of the establish-
ment of equilibrium on product markets, reducing government budget deficit, cut-
ting subsidies in different sectors of the economy, changing inefficient credit
policies, enforcing strict tax laws, curbing inflation, and achieving an export-
sensitive, sustainable exchange rate.
As part of this process, the restructuring of old production is extremely im-
portant because it changes the behavior of domestic producers and induces sys-
temic changes to economic agents determined by the external impacts and col-
lapse of former dominating CMEA «markets».
Privatization, both small and large-scale, transforms the form of property
from state-owned to private-owned. Moreover, it establishes private property
rights, disciplines domestic producers, and sets market «rules of the game».
The third aspect is trade liberalization, which introduces foreign influences
to the previously closed domestic economy. Trade liberalization, also, symbolizes
a movement from direct government regulation by use of restrictions towards a
market price mechanism. Furthermore, it brings innovation and foreign competi-
tion to the country.
PROBLEM STATEMENT
The liberalization of trade is an integral part of the transition to market economy.
The previous, artificial isolation from world markets now placed the domestic
producers, consumers, and the government in a completely new environment. The
domestic producers were thoroughly exposed to foreign competition, higher qual-
ity, and more efficient production from abroad. On the other hand, the consumers
gained access to a variety of new goods and services, and experienced manifold
increases in prices at home and decreases in real wages. In order to guide the
process and to alleviate society’s adjustment costs, the government had to shoul-
der social responsibility.
The proposition is to investigate the role and behavior of the above-
described three agents in the period of transition. The proposed model examines
two schemes of interaction of economic agents. First, the global market system
includes the model of «objective» expectations, the emerging domestic market,
and the influence of world markets on the open economy. In the proposed situa-
tion, economic agents use the model to predict the market price and plan their fu-
ture actions. The new price on the domestic market and the influences of the
world market conditions subsequently check on these expectations and change the
course of action for the following period. This, also, allows the economic agents
to improve their expectations within the constraints of the model.
G. Oganesyan
ISSN 1681–6048 System Research & Information Technologies, 2010, № 3 124
Second, the model shows the «subjective» expectations that result from the
interaction of the above-mentioned pricing scenarios. The domestic producer de-
termines own price by considering two major factors. One of the factors is the
demand-supply disequilibrium on the domestic market and the export-import dis-
parity. The second factor is the cost price of old, inefficient technologies. This
factor represents, to a certain extent, the cost of transfer to better and more
advanced ways of production that arise from the introduction of foreign competi-
tion. On the other hand, the consumer determines the demand for goods and ser-
vices on the domestic market, thus implicitly affecting the price. The government
regulates interest rate and tariff policies in an attempt to curb inflation; the hyper-
inflation price is based on price expectations determined by the model and the
money supply. The government also allocates a portion of tariff revenues as a
subsidy to consumer’s money stock. The world market price is not influenced by
the domestic economy and works as a countervailing factor on the domestic price
formation.
Several main features of transition economies that motivate the price forma-
tion model can be described as following [2].
Inflation. Despite the existence of market distortions, the pressure of inter-
national competition turned out to be the driving force of enterprise reform and
encouragement of firms to adjust their costs, reallocate resources, and bring prices
to competitive levels. As a result, and as a «rationalization» of domestic prices,
inflation has become one of the main problems in transition economies. The sud-
den liberalization of prices has released enormous inflationary pressures onto the
economy.
The «new» state-owned enterprises. The dominance of state-owned enter-
prises and strong monopoly (these should be sharply contrasted to the fledgling
private sector) is strongly connected to this problem. Full mass-privatization has
not been achieved; therefore, the existence of «rent-seeking» behavior, divergent
price-setting, irrational structure and dislocation of resources should be expected.
The strong «vested interests» in control and ownership of these «new» enterprises
have shifted the «consensus» in their favor, and continued subsidies and price
supports of various kinds.
Trade liberalization and its impacts. Trade liberalization would bring
about prevalence of the world market conditions in the country. The mechanism
by which this will come about is the downward pressure on the exchange rate.
The repressed demand of the past would now be consumed in imports, which
would further deteriorate the terms of trade and worsen the trade deficit. This sub-
sequently would severely increase the pressure on restricting imports.
The government’s role in transition. The government’s role in transition
remains very important as a catalyst of reforms. However, now the government
should use non-direct market controls for providing all main components of tran-
sition. The fields of government actions in transition comprise of tariff measures
that affect exports and imports, management of enterprise restructuring and priva-
tization, credits and subsidies, and monetary policy.
Uncertainty. The processes in a transition economy have an impact of un-
certainty, including uncertainty in the behavior of consumers and producers, con-
nected to exposure to a new economic environment and learning. As a future goal
of this investigation, the consumer learning in the form of changing-over-time
Price formation mechanism and tariff protection in a dynamic model of a small open economy …
Системні дослідження та інформаційні технології, 2010, № 3 125
probabilities on selecting prices on the internal market should be considered. This
would make the consumer more sensitive to the choice of goods and services.
Objectives to be achieved through the solution of the proposed model help
define the price formation mechanism based on the general attributes of a small
open economy in transition in order to recognize the specific behavior of the gov-
ernment, big state-owned enterprise, and consumer in different conditions of the
reforming economy, specifically, to develop the dynamic mathematical model of
such behavior, and to apply some optimization methods for determining the opti-
mal interest rates and optimal tariffs as market control tools in the reforming
process.
MATHEMATICAL MODEL
The model is based on several simplifying assumptions: it applies to a small open
economy in transition; it assumes single commodity with no intermediate imports,
no currency substitution, and with only one mode of production and no productiv-
ity gains; capital changes or transaction costs are ignored, and no difference exists
between base money and government credit. Other assumptions will be explained
later. This is a dynamic model described by a system of nonlinear differential
equations. The numerical methods were used to solve equations simultaneously,
and to find varied values of system's parameters. These methods are based on fi-
nite-difference approximation for time-valued derivatives. In equation form, the
second sign usually signifies time derivatives. The solution of the system is a time
vector of prices, the exchange rate, demand-supply, exports-imports, etc.
The price formation mechanism is determined in the following way. Let’s
consider four factors that affect prices of one type of good on the domestic market
of a small open economy in transition.
The first factor is the affect of the domestic producer, which is described as
follows:
• domestic producer price m
dP dynamics are determined by demand-supply
disequilibrium and by foreign trade balance of one good as
))(imp)(exp(/1))()((/1 21
' tttutSP m
d −+−= εε , (1)
where )(tS is a demand on the market for this kind of good; )(tu is the produc-
tion capacity of domestic producer; )(exp t is the volume of exports for this good;
)(imp t is the volume of imports for this good; 1ε , 2ε — elasticities.
The second one is the affect of inefficient domestic production [3], which is
described as follows:
• the cost price of inefficiency )(ˆ tP is determined by the ratio of exports to
imports (including production):
ePtP tttut ))}(imp)(/()(exp1{
0
ˆ)(ˆ +−= , (2)
where 0̂P is the cost price of innovation (when exports equal imports).
G. Oganesyan
ISSN 1681–6048 System Research & Information Technologies, 2010, № 3 126
The general «monopoly» price is described as a weighted sum of m
dP and P̂ :
)(ˆ)()1()( 11 tPtPtP m
d
m
d αα +−= , (3)
where 1α is the index of openness.
So, if 1α is equal to zero, then the fully closed economy is investigated. In
this case, the «monopoly» price on the domestic market is formed only by the
domestic producer price m
dP . However, if 1α is equal to one, then a fully open
economy is investigated. In a fully open economy, the «monopoly» price on the
domestic market is formed only by cost price of inefficiency P̂ .
The third factor that affects the prices on the domestic market is the in-
fluence of the money supply, which is described as the Cagan hyperinflation
price 2P :
)(
2 )( tYetP = (4)
and
γα +−=′ )(ln)( tYMtY S , (5)
where 0>α , γ are parameters of the model, SM is the value of money supply.
The fourth factor examined in the model is the impact of the world market
prices, described as projection of the world market prices into the domestic mar-
ket [1], the so-called «projection» price W
dP :
)()( tPtP WW
d ε= , (6)
where WP is the constant price on the world market, and )(tε is the exchange
rate.
The dynamics of the «projection» price are completely determined by the
dynamics of the exchange rate, which are described as follows:
{ }+′−′=′ WW
d
W
d PPPtPct //)()( 1ε
( ) ( ){ } ( ){ })(/)()()(imp)(exp/)(imp)(exp 32 tMtMtMcttttc SdS −++−+ , (7)
where )(tMd is the value of money demand; 321 ,, ccc — are parameters.
It is assumed, that the domestic price level )(tPd is determined at every time
period t as follows:
{ } +−= )()(/))(exp)(()( tPtSttutP m
dd
{ } { } )()(/)()()1()(/)(imp 2 tPtMtMtPtSt dS
W
d +++ τ , (8)
where τ is a tariff on imported goods.
To complete the system of equations, the dynamics of exports and imports
for a good economy are determined as follows:
( ){ } )()(exp/)()(pex tutPPtPt W
d
W
d ′+−=′ ;
( ){ } )()(imp/)1()()(pim tStPPtPt WW
dd ′++−=′ τ .
Price formation mechanism and tariff protection in a dynamic model of a small open economy …
Системні дослідження та інформаційні технології, 2010, № 3 127
Let’s assume that it’s impossible to import and export the same one good at
the same time. Let’s also assume that the volume of exports is always less than
the production level.
The dynamics of money supply — money demand are described by the fol-
lowing equations:
δ+=′ itMtM SS )()( ,
)()( tiMWtM dd −=′ ,
where i is the interest rate, and W is the growth of GDP.
The last block of equations describes the dynamics of the money available to
consumer )(tD :
)())(imp)((exp)()()( tQtttPtiDtD d +−+=′ ;
)(/)()( tPtDtS d= — is the demand for the model’s tradable good;
)(imp)()( 1 ttPqtQ d= — is the government subsidy to the consumer.
NUMERIC SIMULATION
The numeric simulation was made to evaluate the price trends in cheese segment
of the food market in Ukraine that had a substantial amount of export-import op-
erations. Here are some condensed notes from the analytical data regarding
Ukrainian cheese market at the end of 2009.
The statistical information [4] shows that the wholesale prices for Ukrainian
distributors to buy cheeses of popular brands («Dutch», «Russian») were 40–43
UAH/кg in December 2009. As a result, the Ukrainian products were comparable
in price with the European analogues, because the raw price of the similar cheeses
imported from Poland made about 42–43 UAH/kg taking into account all import
tariffs (10%) and VAT (20%).
For the same time period the demand did not go down on cheeses in
Ukraine, and during 2009 cheese consumption remained stable enough. During 11
months of 2009 domestic enterprises produced 215,9 thousands ton of hard
cheeses. Ukraine remains the large exporter of cheeses, and the costs of internal
market on these products are closely associated with tendencies at the world mar-
kets, especially in the countries of the CIS. For example, in the second half-year
of 2009 an average monthly production was 17–18 thousands ton, and about 6–7
thousands ton were exported at the average wholesale price of 5000 US dollars
per ton.
The analytical data for the cheese market in Ukraine was used to calculate
the price trends at the internal market of Ukraine with a current import tariff of
10%, and for the hypothetical, high import tariff of 90%. The results of numeric
simulation are presented on fig. 1–2.
The graphs on fig. 1–2 illustrate stable growth of the domestic prices reach-
ing 44000 UAH/ton with 10% import tariff, and 47000 UAH/ton with artificially
high 90% import tariff at the end of one year time period. These results also could
be interpreted as relatively stable state of demand-supply and export-import equi-
librium on cheese market of Ukraine. The graphs on fig. 3–5 illustrate insignifi-
cant impact of the National Bank APR variations on the annual prices trends in
comparison with the impact of import tariffs variations.
G. Oganesyan
ISSN 1681–6048 System Research & Information Technologies, 2010, № 3 128
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1 31 61 91 121 151 181 211 241 271 301 331 361
4
3 1
2
5
Dynamic of Prices, annual trend, high import tariff
Days, 1 year
P
ric
e,
U
S
D
Fig. 1. Dynamics of prices, annual trend, and import tariff 90%; 1 — Domestic Manufac-
turer, 2 — Monopoly Price, 3 — Hyperinflation Price, 4 — Domestic Price, 5 — World Price
$38,000.00
$39,000.00
$40,000.00
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4
2
1
3
5
Dynamic of Prices, annual trend, low import tariff
Days, 1 year
P
ric
e,
U
S
D
Fig. 2. Dynamics of prices, annual trend, and import tariff 10%; 1 — Domestic Price, 2 —
Domestic Manufacturer Price, 3 — Monopoly Price, 4 — Hyperinflation Price, 5 — World Price
$38,000.00
$39,000.00
$40,000.00
$41,000.00
$42,000.00
$43,000.00
$44,000.00
$45,000.00
$46,000.00
$47,000.00
$48,000.00
1 31 61 91 121 151 181 211 241 271 301 331 361
4
2
1
3
5
Dynamic of Prices, annual trend, bank APR 8%, low tariff
Days, 1 year
P
ric
e,
U
S
D
Fig. 3. Dynamics of prices, annual trend, and import tariff 10%, APR 8%; 1 — Domes-
tic Price, 2 — Domestic Manufacturer Price, 3 — Monopoly Price, 4 — Hyperinflation
Price, 5 — World Price
Price formation mechanism and tariff protection in a dynamic model of a small open economy …
Системні дослідження та інформаційні технології, 2010, № 3 129
REFERENCES
1. Christev A. The Hyperinflation Model of Money Demand (or Cagan Revisited):
Some New Empirical Evidence from the 1990s. — http://www.sml.hw.ac.uk/
cert/wpa/2005/dp0507.pdf.
2. Mikhalevich M.V., Sergienko I.V. Modeling Transition Economy. Models, Methods,
Information Technologies. — Kyiv: Naukova Dumka, 2005. — P. 26–49.
3. Guriev S., Pospelov I. Inefficient Equilibria in Transition Economy. — http://
www.emis.de/journals/HOA/DDNS/3c19.pdf.
4. Borisova S. Export whipped up cheese prices // Comments, Kiev, № 201, 01.15.10.
Reseived 26.02.2010
From the Editorial Board: the article corresponds completely to submitted
manuscript.
$38,000.00
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$43,000.00
$44,000.00
$45,000.00
$46,000.00
$47,000.00
$48,000.00
1 31 61 91 121 151 181 211 241 271 301 331 361
3
5
1
2
4
Dynamic of Prices, annual trend, bank APR 25%, low import tariff
Days, 1 year
P
ric
e,
U
S
D
Fig. 4. Dynamics of prices, annual trend, and import tariff 10%, APR 25%; 1 — Do-
mestic Manufacturer Price, 2 — Monopoly Price, 3 — Hyperinflation Price, 4 —
World Price, 5 — Domestic Price
$38,000.00
$39,000.00
$40,000.00
$41,000.00
$42,000.00
$43,000.00
$44,000.00
$45,000.00
$46,000.00
$47,000.00
$48,000.00
1 31 61 91 121 151 181 211 241 271 301 331 361
4
2 1
5
3
Dynamic of Prices, annual trend, bank APR 25%, import tariff high
Days, 1 year
P
ric
e,
U
S
D
Fig. 5. Dynamics of prices, annual trend, and import tariff 90%, APR 25%; 1 — Do-
mestic Manufacturer Price, 2 — Hyperinflation Price, 3 — World Price, 4 — Domestic
Price, 5 — Monopoly Price
|
| id | journaliasakpiua-article-106955 |
| institution | System research and information technologies |
| keywords_txt_mv | keywords |
| language | English |
| last_indexed | 2025-07-17T10:21:50Z |
| publishDate | 2010 |
| publisher | The National Technical University of Ukraine "Igor Sikorsky Kyiv Polytechnic Institute" |
| record_format | ojs |
| resource_txt_mv | journaliasakpiua/17/12e27fd4dbd7c43ec636e5f2ff36e017.pdf |
| spelling | journaliasakpiua-article-1069552018-04-06T12:28:40Z Price formation mechanism and tariff protection in a dynamic model of a small open economy in transition Механизм формирования цен и тарифы в динамической модели небольшой открытой переходной экономики Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки Oganesyan, Gayane This paper examines the importance and dynamics of prices in a small open economy in transition. Several main features of this process outline the behavior of the mathematical model. The model examines four factors that affect prices after the liberalization of the domestic market: the domestic producer price, the cost price of inefficiency, the hyperinflation price, and the world market price, which includes the dynamics of the exchange rate. The numeric simulation of the price dynamics for the cheese segment of Ukrainian food market was made. Исследованы основные процессы, влияющие на динамику цен в небольшой открытой переходной экономике. Рассмотрено несколько отличительных особенностей такой экономики, определяющих поведение математической модели. В модели учтены четыре фактора, которые влияют на ценообразование после либерализации внутреннего рынка: цена внутреннего производителя, цена неэффективности производства, гиперинфляционная цена и цена на мировом рынке, которая, в свою очередь, учитывает динамику валютного курса. Представлены результаты многочисленного моделирования динамики цен в одном из сегментов рынка продовольственных товаров в Украине, а именно, рынка твердых сыров. Досліджено основні процеси, що впливають на динаміку цін у невеликій відкритій перехідній економіці. Розглянуто декілька характерних особливостей такої економіки, що визначають поведінку математичної моделі. У моделі враховано чотири фактори, що впливають на ціноутворення після лібералізації внутрішнього ринку: ціна внутрішнього виробника, ціна неефективності виробництва, гіперінфляційна ціна та ціна на світовому ринку, яка, в свою чергу, враховує динаміку валютного курсу. Представлено результати чисельного моделювання динаміки цін в одному з сегментів ринку продовольчих товарів на Україні, а саме, ринку твердих сирів. The National Technical University of Ukraine "Igor Sikorsky Kyiv Polytechnic Institute" 2010-09-25 Article Article application/pdf https://journal.iasa.kpi.ua/article/view/106955 System research and information technologies; No. 3 (2010); 122-129 Системные исследования и информационные технологии; № 3 (2010); 122-129 Системні дослідження та інформаційні технології; № 3 (2010); 122-129 2308-8893 1681-6048 en https://journal.iasa.kpi.ua/article/view/106955/101954 Copyright (c) 2021 System research and information technologies |
| spellingShingle | Oganesyan, Gayane Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title | Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title_alt | Price formation mechanism and tariff protection in a dynamic model of a small open economy in transition Механизм формирования цен и тарифы в динамической модели небольшой открытой переходной экономики |
| title_full | Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title_fullStr | Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title_full_unstemmed | Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title_short | Механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| title_sort | механізм формування цін і тарифи у динамічній моделі невеликої відкритої перехідної економіки |
| url | https://journal.iasa.kpi.ua/article/view/106955 |
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