|**Tool name:**|**123PRSP**|
|---|---|
|**What is it?**|123PRSP (one country, two sectors, and three goods) is a static CGE model.|
|**What can it be used for?**|123PRSP can be used to analyze the impact of macroeconomic policy and external shocks on income<br>distribution, employment, and poverty.|
|**What does it tell you?**|It allows for a forecast of welfare measures and poverty outcomes that is consistent with a set of<br>macroeconomic policies in the context of a very simple general equilibrium model. For a given set of<br>macroeconomic policies, 123PRSP generates a set of wages, sector-specific profits, and relative prices<br>that are mutually consistent. The projected changes in prices, wages, and profits are then inputted into<br>household data on wages, profits, and commodity demand among representative groups or segments of<br>the distribution. In principle, 123PRSP can calculate the policy impact on each household in the sample<br>so as to capture the effect on the entire distribution of income. For a given poverty line, 123PRSP can<br>also compute the effect of different poverty measures.|
|**Complementary tools:**|Analysis of impacts on income distribution could be complemented by social impact analysis and<br>institutional analysis, which look at variables that would affect household participation in growth.<br>Scenario analysis, which helps policy makers assess the effects of major discontinuities on economic<br>projections,could complement CGE models operatingon a long-time horizon.|
|**Key elements:**|123PRSP can be viewed as a middle ground between consistency models such as RMSM-X and more<br>sophisticated approaches such as disaggregated CGE models. The former are simple to estimate and<br>use, but consider the two most important determinants of poverty – economic growth and relative<br>prices – as exogenous. The latter are useful for capturing the poverty impacts of policies, but are too<br>data intensive and difficult to master. One salient feature of 123PRSP is its modular approach; by<br>linking several existing models together, it can make use of individual modules that already exist.<br>Furthermore, if a particular module is not available because of data-related reasons or other reasons,<br>the rest of the framework can be implemented without it.|
|**Data/information:**<br>**quirements**|The 123PRSP model requires national accounts, a SAM, and some basic distributional data or a<br>household survey. The model builds on an existing static aggregate model, such as the International<br>Monetary Fund’s Financial Programming Model (containing a consistent set of national accounts that<br>are linked with fiscal balance of payments and monetary accounts). Macroeconomic policies are then<br>fed into the “get real module” or an alternative country-specific model of long-run growth<br>determination and into a trivariate VAR module of short-run fluctuations. This trivariate module would<br>require historical national account data. Both long-run and short-run projections would then feed into<br>the 1-2-3 model to generate projections on changes in wages, profits, and the prices of the three goods,<br>which in turn are fed into a household data module to capture the effects of macroeconomic policies on<br>poverty.|
|**Time:**<br>**Re**|About three months if a household survey and the macro-model are available.|
|**Skills:**|Experienced modelers with expertise in financial programming and advanced time-series econometrics.|
|**Supporting**<br>**software:**|EViews, Excel.|
|**Financial cost:**|Aside from any cost for the development of the macro-model or the household survey, about<br>US$25,000 to set out a new model.|
|**Limitations:**|As noted above, 123PRSP adopts several strategic simplifications in order to make the model user-<br>friendly. The disadvantage of adopting this approach is that the causal chain from macroeconomic<br>policies to poverty is in one direction only. In this regard, the model does not capture the feedback<br>effect of changes in the composition of demand (due to shifts in the distribution of income) on<br>macroeconomic balances.|
|**References and**<br>**applications:**|�<br>For an overview of the technique, see Devarajan and Go (2003).|

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