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Agricultural Economics Lecture 8: Agricultural Trade

Agricultural Economics Lecture 8: Agricultural Trade

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Text of Agricultural Economics Lecture 8: Agricultural Trade

  • Agricultural EconomicsLecture 8: Agricultural Trade

  • Whats happening to world ag. trade?

  • Whats happening to world ag. trade?

  • Income per person, 1995 (with sub-national data for 19 countries) Source: Sachs, JD, Tropical Underdevelopment. NBER Working Paper 8119. Cambridge, MA: NBER.Who are the ag. exporters? Why?

  • Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole, 2000. "Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.

  • Food Expenditures as a Share of Total Consumer Expenditures in the US

  • The gains from trade are similar for bothimportable and exportable goodsPtPeQdQeSupplyDemandPrice($/unit)ABQsPtPeQsQeABQdwith imports, consumers gain more than producers lose:with exports, producers gain more than consumers lose:

  • So why dont we see free trade?PtPeQdQeABQsPtPeQsQeABQdTo understand trade policy, lets start by describing it: For which goods do governments usually restrict trade?Effect of free trade in importable goodsEffect of free trade in exportable goods

  • Given these effects of trade, what do governments choose to do?Free tradefor imports helps consumers but hurts producers;for exports helps producers but hurts consumers.

    Which constituencies do governments favor?

  • So why do governments restrict imports?the most common arguments against free trade are: foreigners are dumping their products and will raise their prices eventually our producers are infant industries and will reduce their costs eventuallypollution, labor standards or other market failures make prices not reflect full costs/benefits if we have a large share of the world market, restricting trade could improve our prices all these could be true, but economists find that they do not actually explain what governments do

    the only plausible explanation is that governments favor some groups over others. This is a significant source of inefficiency and low incomes in all economies!

  • Beginning from the year 1980, Turkey changed its economic development policy from import substituting industrialization to export led growth strategy. Economy opened up to world trade, export-promoting incentives were initiated (including tax exemptions, rebates and favorable credit terms), direct import controls have been eliminated, and quantity restrictions have been dismantled. State intervention in the economy was reduced to minimum level. As a result of these efforts, Turkey has increased her share from world markets, from 0,15% in 1980 to 0,6% in the year 2003. Between 1980 and 2004 exports of Turkey has increased from 2,9 billion dollars to 63 billion dollars. Structure of exported goods has also changed much from mainly agricultural products and raw materials to higher value added industrial products. Transformation still continues with increasing exports of transportation vehicles and office equipments.

  • Trade and WelfareAutarky/closed economy the nation is self-sufficient, no trade takes place between nations, and markets are in equilibrium.Arbitrage purchasing commodities in one market at a low price and rapidly selling them in another market at a higher price.Partial equilibrium and excess supply goods will always move from where prices are low (excess supply) to where prices are high (excess demand).

  • Page 528The equilibrium price in the U.S. market is PUS.at prices above PUS, themarket would exhibit excess supply conditions.

    At price PE, for example,producers would supplyQSUS3 while consumerswould only want QDUS4.

  • Page 528The market equilibrium inJapan occurs at Pj. At pricesbelow Pj, excess demandconditions will occur.

    At PE, for example, consumerswere willing to buy QDj4 while producers only wished to supply QSj3.

  • Page 528U.S. price where excesssupply (ES0) is equalto zero

  • Page 528Japanese price whereexcess demand (ED0)is equal to zero

  • Page 528If the price in Japanis Pj2, excess demandwould be ED1.If the price in the U.S.is PUS2, excess supplywould be ES1.

  • Page 528Thru trade, both countrysmarkets would be in equilibrium where ED=ESat price PE.

  • Page 528If the price in Japan is PE, consumer surplus would increase by area a+b whileproducer surplus would fall by area a.If the price in the U.S. isPE, consumer surplus woulddecline by area 1+2 whileproducer surplus wouldincrease by area 1+2+3.

  • Gains to TradeBoth countries register a net societal gainin economic welfare. The winners andlosers differ however

  • Why Restrict Trade?To protect a new or infant industryTo counter unfair foreign competitionTo improve the balance of paymentsTo protect national health, the environment or food safety

  • Trade RestrictionsTariff barriersNontariff barriers (NTB) Voluntary export restraints (VERs) Tariff-rate quotas (TRQ) Import quotas

  • Page 534DomesticdemandDomesticsupplyDomestic market equilibriumunder free market conditionsshows a price of $4,000 andquantity of 50 tons.50

  • Page 534Free trade supplyPrevailingworld priceQuantitysuppliedQuantitydemandedExcess Demand60 = 80 20

  • Page 534Prevailingworld priceplus tariffQuantitysuppliedQuantitydemandedExcess Demand20 = 60 40 Supply with tariff

  • Welfare Effects of TariffConsumer surplus before the tariff on the previousslide was equal to area a+b+c+d+e+f+g.

    After the tariff, consumer surplus would fall to area e+f+g, or a loss of area a+b+c+d.

    Producer surplus increases from area h to area a+hafter the tariff.

    The tariff revenue received by the government is equal to area c.

    Dead-weight loss to society is equal to area b+d.

  • Page 539Autarkicprice

  • Page 539Free tradesupply

  • Page 539Combines both a tariffand a quotaTariff rate for imports under quotaFree tradesupply

  • Page 539Combines both a tariffand a quotaTariff rate for imports under quotaTariff rate for imports over quotaFree tradesupply

  • Page 539Combines both a tariffand a quotaTariff rate for imports under quotaTariff rate for imports over quotaFree tradesupplyProducersurplusincreasesby area eas price to $200

  • Welfare Effects of TRQConsumer surplus would fall as a result of theTRQ by area e+f+d+a+c+b+g.

    Producer surplus increases by area e+d

    The revenue received by the government is equal to area a+b+c.

    Dead-weight loss to society is equal to area f+g.