The Production, Accessibility & Consumption Model
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APEurope Economics Unit
The PAC Model, step by step ...
The Production, Accessibility and Consumption Model (PACM) is a supply side analysis of the contribution of production level activities to the ability of consumers to acquire their consumption needs with the income they possess. In order to understand the significance of the supply side as opposed to the demand side analysis, this article covers the accessibility and consumption needs or the "AC" part of the PACM. The "P" part of the PACM is slightly more complex and will be covered in a subsequent article (Part 2).
The PAC Model is a product of the Real Incomes Approach to economics. This approach to macroeconomics was initiated in 1975, at the same time as so-called supply side economics. Both of these approaches were designed to tackle slumpflation, the combination of high inflation and falling employment levels, that resulted from the significant rises in international petroleum prices in the mid-1970s. The difference between what is known as supply side economics and the real incomes approach is that supply side economics is a fiscal device based on the Aggregate Demand Model which in practice, under the Reagan administration, resulted in the typical ADM outcomes of creating increased disparity in incomes creating winners, losers and some in a policy neutral impact state. The real incomes approach is however based on consumer needs and is more supply side oriented because the resolution of the negative ADM effects depend heavily on supply side producer decisions aiming to secure a mutual benefit of increased real incomes distribution. This helps alleviates the downward spiral in the purchasing power of the lower income segments.
Thomas Malthus noted that human populations grew in geometric progression linked to the natural population growth rate (difference between birth and death rates) and he observed that food production increases in an relationship of diminishing marginal returns to inputs on a fixed area of land. He therefore concluded that physical consumption requirements will grow faster than the supply of food leading to eventual shortages of food.
Although yields of crops and livestock have been increasing steadily since Malthus' time, the growing population distribution has displaced agricultural areas. Agriculture consumes something like 80% of available water supplies and the population has risen 770% time since Malthus recorded his observations, rising from 1 billion people in 1800 to around 7.7 billion now (2019). As more productive land is used up and soil fertility declines the overall carrying capacity of land in relation to the population numbers is being stretched to the limits.
The majority of transactions involving food depend on the exchange of money. Therefore the ability of people to consume their food requirements depends upon their income levels and food prices. General rises in the prices of goods and services (inflation) results in the purchasing power of income falling; real incomes decline. Therefore besides the Malthusian concern with the rate of population increase we face an additional concern of the rate of inflation. As a result, the Malthusian prediction is more of a reality than many wish to admit, and this is the result of population growth rates and economic policies that do not control inflation.
Population growth and inflation
Population and inflation both impact the decline in ability of people to access food requirements because of their combined impact on purchasing power or real incomes. The relationship between real incomes growth, nominal incomes, population growth and inflation is provided below:
dR is the growth in real income;
dN is the growth in nominal income;
dP is the population growth rate;
dI is the inflation rate or rise in average unit prices.
The impact of population growth and inflation can be dramatic. For example a typical inflation rate in an East African country of 6% and natural population growth rate of 2.8 will result in a reduction of purchasing power of 8.8% each year which is equivalent to a decline in purchasing power of the currency of 37% in 5 years. For real incomes to rise over this period would require a rise in nominal incomes, over the same period of at least 37%, or an annual increase in excess of 8.8%.The table below indicates this rate of purchasing power erosion which rapidly reduces income to below levels necessary to sustain the consumption of essential products such as food.
Although the title Production, Accessibility and Consumption follows the flow of a good or commodity from its production location to the consumer it is easier to follow the logic by starting with the determinants of accessibility or the relationship between real income per capita and unit prices. Once the these relationships are clarified the role of the factors of production become evident. The sequence of graphs below follow a simple analytical sequence to illustrate where "Malthus at the margin" occurs in both high and low income economies.
The conventional supply and demand graph provides little information on the state of consumption needs of the population because "demand" is only the transactional turnover of consumption. Population growth and inflation do not feature in this static presentation.
In order to identity the critical market areas where there are issues of low income segments not being able to access their needs the distribution of family incomes is a first step in this analysis. To the left are high income families and on the left, low income families.
The curve above is inverted horizontally to place the lower income segments on the right hand side.
The per family disposable incomes are multiplied by the number of families in each disposable income bracket to generate a curve that shows the size of the aggregate disposable income as a curve associated with families in each disposable income class.
In order to understand the exposure of individuals to limitations in disposable incomes the per family data is divided by the average number of people in each family to create a per individual disposable income curve. This normally shows the degree of inequality existing by the differences in per capita disposable income across the population. This analysis exposes population segments that are exposed to the impacts of inflation and, indeed, size of their family, to reductions in purchasing power and real incomes. So segment "d" is a critical zone where even low inflation will reduce their purchasing power within a shoer period.
The analysis then concentrates on the lower income tail end of per capita disposable income in order to isolate those in a precarious income status.
Associated with each per capita disposable income there will be typical consumption patterns varying from bare essentials in the lowest segment e.g. the green "c" box and then including addition items and consumer goods as the per capita disposable income increased to the left.
In the case of low income countries and low income segments food consumption can account for 60% of consumption with other items such as energy and abode and others coming in second place. The plight of lower income families under inflation has impacted high income countries such as the UK and USA which today have higher inequalities that some low income countries. In the UK many people in work now resort to free food banks to feed their families in a state of affairs that parallels many in low income countries.
Malthus at the margin
The incessant movement for the lower income segments is towards destitution is something that can occur with ease. This state of affairs exists in low income segments in high income as well as low income countries. These unacceptable circumstances occur because of:
McNeill, H. W., "Why Agenda 2030's Sustainable Development Goals are not being met, Part 1"
McNeill, H. W., "Malthus at the margin", Decision Analysis Initiative, GBF, London, 2008;
Real incomes approach to economics bulletins available on The Real Incomes Approach to Economics
McNeill, H.W., "Price Performance Fiscal Policy - A Real Incomes Approach", Rio de Janeiro, 1976;