The foundation of SISMod analysis is a series of modules, taking into account household incomes and expenditure and estimating demand/supply/price transmission elasticities based on data from household surveys, national food price collection systems, and other assessments. The process determines the interaction between production and income-generation decisions (income effects) and consumption decisions (price effects), which quantify the impacts of price changes and income changes on household food consumption.
SISMod-Light adopts the Agricultural Household Model approach developed by Singh et al. (1986). In this model, household consumption decisions are based on household income, which comprises agricultural profits as well as wages, remittances and any other type of income. Income generation and the allocation of income to expenditure are based on separable decisions, which maximize income and utility in a two-step process. The Agricultural Household Model incorporates both household production and consumption. It integrates price effects – which are presumed to be exogenous – and takes interactions between them into account.
Unlike in pure consumer models, in the Agricultural Household Model the household budget is not fixed but endogenous and depends on production decisions that contribute to income through agricultural profits. This implies that the additional effects of agricultural profits, which can be simultaneously positive and negative, are added to the standard Slutsky equation (Taylor, 2003). For example, an increase in the price of staples unleashes to two opposing forces: the traditional price effects (where household food demand decreases when the price rises), and the opposing effect of agricultural profits (which, by contributing to household total income, lift budget constraints thereby increasing household food demand). Therefore, a change in price of a given commodity affects both supply and demand decisions.
The key concept of the model is shown in the following diagram showing the framework: