AGEC 340 Lecture Slides, Fall 2002

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(No Transcript)
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Quiz 2 Some formulas numerical examples
CONSUMER DEMAND THE EFFECT OF PRICES ON
CONSUMPTION -- To measure how much consumption
is affected by price, economists often use the
price elasticity of demand. What is the
mathematical definition of this measure? ?
?Q/?P ? ?P/?Q ? ?Q/?P ? ?P/?Q ? none of
these -- If the price elasticity of demand for
food is -0.3, when price rises by ten percent
(10), by how much does food consumption
change? ? 0.30 ? 3.00 ? 30 ? 3 ? not enough
info. -- If the price elasticity of demand for
food is -0.3, when price rises by ten dollars
(10), by how much does food consumption
change? ? 0.30 ? 3.00 ? 30 ? 3 ? not enough
info. -- If the demand curve is steeper (a slope
that is larger in absolute value, with more
rise/run), then the price elasticity of demand
will be a larger number T / F
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Quiz 2 Some formulas numerical examples
CONSUMER DEMAND THE EFFECT OF INCOME ON
CONSUMPTION -- To measure how much consumption
is affected by income, economists often use the
income elasticity of demand. What is the
mathematical definition of this measure, where
the letter Y is used to denote income? ?
?Q/?Y ? ?Y/?Q ? ?Q/?Y ? ?Y/?Q ? none of
these -- If the income elasticity of demand for
food is 1.0, when income rises by ten percent
(10), by how much does food consumption
change? ? 0.10 ? 1.00 ? 10 ? 1 ? not enough
info. -- If the income elasticity of demand for
food is 1.0, when income rises by ten dollars
(10), by how much does food consumption
change? ? 0.10 ? 1.00 ? 10 ? 1 ? not enough
info. -- If the Income-Consumption (Engel)
curve is steeper (a larger slope, with more
rise/run), then the income elasticity of demand
is a larger number T / F
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Quiz 2 Some historical facts

• DEMOGRAPHIC TRANSITION CHANGES IN BIRTH AND
  DEATH RATES
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• As a result of changing death and birth rates,
  over the entire demographic transition
• -- Population growth (measured in percent per
  year) tends to
• ? rise ? fall ? rise then fall ? fall, then
  rise then fall again
• -- Population size (measured in millions of
  people) tends to
• ? rise ? fall ? rise then fall ? fall, then
  rise then fall again
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• Historically, in todays rich countries,
• -- Death rates began to decline after modern
  medicine was invented T / F
• -- Birth rates began to decline after modern
  contraception was invented T / F

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AGEC 340 -- International Economic
DevelopmentWeek 5 Feb. 10 12

• For this week
• (1) read ch. 5, pp. 81-86 rest of ch. 5 for
  next week
• (2) remember paper topic and sources due Thurs.
• Topic is a title plus one-paragraph description
• Sources is at least 10 biliographic citations
• Assignment will be graded on
• the match between topic and sources
• the quality of presentation
• put name, date, course at top right
• proofread carefully!
• total is out of 50 points (two quizzes or
  exercises)

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AGEC 340 -- International Economic
DevelopmentWeek 5 Economic growth and
structural transformation

• As incomes rise, what happens to economic
  structure?
• will look at three aspects of the structural
  transformation
• Agriculture, industry and services as a share of
  income, employment and spending
• The earnings gap between farmers and nonfarm
  workers
• The number of farmers and industrialization
  within agriculture
• There are big surprises ahead in each of these!

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Agricultures share of national income
Our textbook picture of structural transformation
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Agricultures share of employment
Another textbook picture of the transformation
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Foods share of total expenditure
A third textbook picture
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Over time, in the history of rich countries
Share of output from agriculture and mining in
eight high-income countries, 1860-1960
What happens next? Does the share fall to zero?
Source Reprinted from T.P. Tomich. P. Kilby and
B.F. Johnston, 1995. Transforming Traditional
Agriculture. Ithaca, NY Cornell University
Press.
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Among developing countries today, the same
pattern but each countrys path varies
Source Reprinted from World Bank, World
Development Report 2008. Washington, DC The
World Bank (www.worldbank.org/wdr2008)
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Getting richer involves industrialization
Share of output from industry in eight
high-income countries, 1860-1960
but what happens next to industrys share?
Source Reprinted from T.P. Tomich. P. Kilby and
B.F. Johnston, 1995. Transforming Traditional
Agriculture. Ithaca, NY Cornell University
Press.
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Over the full span of development, employment
shifts to services
today, about 80 of jobs are in services
in 1800, employment was 90 farming
in 1930s-70s, industry reached about
40
agricultural employment has stabilized
Source U.S. Economic Report of the President
2007 (www.gpoaccess.gov/eop)
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Another example of structural transformation over
the long run
Source Government of Australia (2001), Economic
Roundup Centenary Edition, Department of the
Treasury, Canberra.
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Some conclusions on structural transformationas
a share of the economy

• As incomes rise, the farm sector declines as a
  share of employment, income expenditure
• The share of industry rises and then falls
• The share of services rises
• The share of agriculture eventually stabilizes
• What happens to the earnings gap between farmers
  and nonfarmers?

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Farm employment and earnings in the United
States, 1889-2000
Agricultural Employment as a Share of Civilian
Employment and Real Farm Output as a Share of
Real GDP
Until the 1930s, employment and output fell
together
and then both stopped falling
then employment fell much faster than output
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.
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The US farm-nonfarm earnings gap, 1910-2000
then caught up
Farm income fell

Source BL Gardner, 2000. Economic Growth and
Low Incomes in Agriculture. AJAE 82(5)
1059-1074.
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Structural transformation and the earnings gap
across countries
The farm-nonfarm earnings gap in 86 countries,
1965-2000
The gap may worsen as incomes rise, then farmers
catch up
Source Peter Timmer, Agricultural Trade Policy
during Structural Transformation. Mimeo,
Stanford Univ., Dec. 2007.
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Structural transformation the story so far

• Farming declines as a fraction of the economy, as
  industry and services grow
• Farmers incomes decline relative to other
  workers, but then catch up
• in the U.S.,
• farmers incomes began to catch up in 1933
• farmers incomes passed non-farmers in 1990s
• (3) What happens within agriculture?

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Does total world agricultural output decline?
Source Reprinted from FAO, State of Food and
Agriculture 2007. Rome FAO (www.fao.org)
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The structural transformation in world
tradeAgricultures share fell while its value
rose
Source Reprinted from FAO, State of Food and
Agriculture 2007. Rome FAO (www.fao.org)
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Does U.S. agricultural output decline?
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What happens to increases in U.S. output?
25-30 exported
12-25 exported
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The bulk commodity business fluctuates, while
value-added exports grow
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Within agriculture, the structural
transformationbrings specialization for inputs
and marketing
Source Reprinted from World Bank, World
Development Report 2008. Washington, DC The
World Bank (www.worldbank.org/wdr2008)
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The stylized facts of structural transformation

• Farming declines as a fraction of the economy, as
  industry and services grow
• Farmers incomes decline relative to other
  workers, but then catch up
• Within agriculture, row-crop production
  fluctuates while agroprocessing and agribusiness
  grows
• but what drives this change? what explains it?

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Explaining Structural Transformation

• Can consumers income growth explain the shift?
• Engels law
• As income grows, demand increases less for food
  and ag. products than for other things
• The income-consumption curve for food is
  relatively flat
• Income elasticity of demand for food lt 1
• Bennetts law
• As income grows, demand increases least for basic
  staples and rises for higher value foods
• The income-consumption curve for staples is very
  flat
• Income elasticity of demand for staples 0

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Explaining Structural Transformation

• Can new technology explain the shift?
• New farm technology Cochranes Treadmill
• New farm technologies that increase output might
  lower prices and push farmers out
• The demand curve for food is relatively steep
• Food demand is price-inelastic
• Price elasticity for food lt 1 in absolute value
• Non-farm technology bright lights, big city
• New nonfarm technologies that create
  opportunities might pull farmers into nonfarm
  work
• The demand curve for non-food is relatively flat
• Non-food demand is price-elastic
• Price elasticity for nonfood gt1 in abs. value

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Explaining Structural Transformation

• Limited land area may matter most of all
• Because total land area is fixed,
• farmers savings and investment eventually runs
  out of on-farm uses, and is applied to other uses
  
• farmers earnings are linked to the number of
  farmers, acres per farmer and earnings per acre

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Farmland area and the number of farmers
Use of land and labor on U.S. farms, 1910-2000
Index value, 1948100
Source W.E. Huffman and R.E. Evenson, 2001.
"Structural and productivity change in US
agriculture, 1950-82." Agric. Economics 24
127-147, extended with more recent data from the
US Economic Report of the President.
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During structural transformation, the numberof
farmers rises, then falls, and finally stabilizes
Source Reprinted from T.P. Tomich. P. Kilby and
B.F. Johnston, 1995. Transforming Traditional
Agriculture. Ithaca, NY Cornell University
Press.
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The number of farmers rises then falls until
farmers incomes catch up to nonfarm earnings
Our textbook picture of structural transformation
within agriculture
farm numbers stabilized by off-farm income and
rising profits per acre latest census shows
slight rise in no. of farms
Figure 5-3. Number and average size of farms in
the United States, 1900-2002.
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In the world as a whole, the number of farmers
has just peaked and will soon decline
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Regions differ sharply in their population growth
rates
Source Calculated from FAOStat data
(www.fao.org).
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Cities are growing much faster than total
population
Source Calculated from FAOStat data
(www.fao.org).
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but cities are still too small to absorb all
population growth, especially in S. Asia and
Africa
Source Calculated from FAOStat chart reprinted
from W.A. Masters, 2005. Paying for Prosperity
How and Why to Invest in Agricultural RD in
Africa. Journal of International Affairs 58(2)
35-64.
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Conclusions on economic growth and structural
transformation

• As incomes grow
• Farming declines as a fraction of the economy
• in favor of industry and services
• even within agriculture
• Farmers incomes at first decline relative to
  others
• but then farm incomes catch up
• eventually farmer incomes pass nonfarmers
  incomes
• The number of farmers first rises and then falls
• speed depends on both population and income
  growth
• eventually the number of farmers stabilizes