Eric A. Monke and Scott R. Pearson
Tool typology: 
Value chain analysis for informing policy and academic debates
Long name: 



The book explains the construction of the policy analysis matrix and the derivation of measures of efficiency and policy transfer used in agricultural policy analysis. The study of agricultural policy spans three levels-microeconomic behavior of producers, marketing and trade, and macroeconomic linkages. Practitioners of agricultural economics typically give different emphasis to these three topics; micro production issues receive the greatest attention, marketing and trade get less, and macroeconomic links receive little or no coverage. This book argues that excessive specialization precludes successful policy analysis; applied agricultural economists need to understand all of the components of and links among farming systems, domestic and international markets, and macroeconomic policy. Policy analysts have to appreciate feedbacks and tradeoffs within the big picture. The Policy Analysis Matrix (PAM) approach is a system of double-entry bookkeeping. Analysts using PAM have to provide complete and consistent coverage to all policy influences on returns and costs of agricultural production. With this method, applied economists need to be equally capable of analyzing, for example, fertilizer response functions, quantitative restrictions on trade, and real effective exchange rates. The main empirical task is to construct accounting matrices of revenues, costs, and profits. A PAM is constructed for the study of each selected agricultural system-using data on farming, farm-to-processor marketing, processing, and processor-to-wholesaler marketing. The impact of commodity and macroeconomic policies can then be gauged by comparison with the absence of policy. 

You can find a html version of this book here:

The three principal purposes of the Policy Analysis Matrix (PAM) methodology are to provide information and analysis to assist policy makers in these three central areas of agricultural policy. 1. The construction of a PAM for an agricultural system allows one to calculate private profitability – a measure of the competitiveness of the system at actual market prices. Similar analyses of other systems permit a ranking of the competitiveness of agricultural systems at market prices. The calculation of private profitability or competitiveness is carried out in the first (top) row of the PAM matrix. 2. A second purpose of the PAM approach is to estimate the agricultural system’s social profitability – the result if products produced and inputs used are valued in efficiency prices (social opportunity costs). Complementary analyses of other systems allow a ranking of the efficiency of agricultural systems. The calculation of social profitability is carried out in the second (middle) row of the PAM matrix. 3. The third purpose of PAM analysis is to measure the transfer effects of policies. By contrasting revenues and costs before and after the imposition of a policy, one can determine the impact of that policy. The PAM method captures the effects of policies influencing both products and factors of production (land, labor, and capital). The measurement of the transfer effects of policies is carried out in the third (bottom) row of the PAM matrix. Source:
Type of tool: 
Main variables (add a few variables which are important for data analaysis): 
profitability identity
divergences identity
the observed market prices
Private profits
prices that would result in the best allocation of resources and thus the highest generation of income
Social profits
Market failures
Efficient policy
Distorting policy
Spatial coverage: 
Domesticated Animal: 
First released on: 
Tuesday, October 10, 2017
Last version on: 
Tuesday, October 10, 2017
Target audience: