Forest sector modeling: A synthesis of econometrics, mathematical programming, and system dynamics methods

Quantitative analysis and forecasting of forest product markets began in the 1950s, based almost exclusively on pure time-series analysis. Since then, considerable improvements have been made in the theoretical basis of the models, the statistical methods of estimation, and the coverage of the data. Especially noteworthy is the exploitation of panel data in the analysis of demand for final products. To model the industry supply of intermediate and final products, however, activity analysis seems more promising than econometrics. It allows for a detailed description of the techniques of production, and, therefore, a better modeling of technical change than the econometric approach. This paper presents a class of models, currently used for policy analysis and forecasting, that present a blend of econometric and mathematical programming, with a dash of system dynamics. Econometrically estimated demand and supply functions are combined with activity analysis of production and transportation, into optimizers to calculate spatial equilibria in multi-product markets. The shadow prices of the optimization are then the key inputs in predicting capacity change by region and process, in system dynamics fashion, and based on Tobin’s q theory of investments.