1. Agricultural Economics
Lecture 1

2. What is Agricultural Economics?
“…an applied social science that deals with how producers, consumers and societies use scarce resources in the production, processing, marketing and consumption of food and fiber products”.

3. What is Agricultural Development?
Here development means what happens over time
change, evolution, growth
it may be an improvement… or not.
We focus on what happens to the whole country
to the entire agricultural sector,
given overall economic development:
higher income, production and consumption
improved health and life expectancy
and many other changes…

4. A key change over time is that people get richer, so when we talk of “more” or “less” developed, what we usually mean is “richer” or “poorer”.
We will usually be descriptive, asking:
what happens over time,
as countries get richer?
what differs across countries
between rich & poor?
And sometimes we will be prescriptive, asking
what should be done,
to help people get what they want?

5. Development involves accumulation, that economists call “capital”:
physical capital (houses, roads, machines)
human capital (education, health)
institutional capital (“rules of the game”)
The accumulation of capital makes it more abundant and cheaper.
But accumulation doesn’t happen automatically.
To build up capital, people must save and invest from one year to the next.

6. new physical things (seeds, chemicals, etc.)
Development also involves innovation, which economists call “technical change”:
new physical things (seeds, chemicals, etc.)
new ideas (crop rotations, etc.)
new institutions (futures markets, etc.)
Innovation makes it possible to produce more of what people want, from the resources they have.
But innovation doesn’t happen automatically.
To innovate, people must be able to change what they do.

7. Agriculture as a share of GDP vs. GNP per capita, 1989
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

8. Agriculture as a share of employment vs. GNP per capita, 1985
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

9. Percent of income spent on food vs. GNP per capita, 1980s
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

13. YEARS
SHARE OF AGRICULTURE (%)
SHARE OF INDUSTRY (%)
SHARE OF SERVICES (%)
1980
24,2
20,5
55,4
1981
22,6
21,5
55,9
1982
22,7
21,9
1983
21,6
22,4 56
1984
20,3
23,1
56,6
1985
19,4
23,6 57
1986
18,8 25
56,2
1987
17,2
24,9
57,9
1988
18,3
25,1
56,7
1989
16,6
25,9
57,5
1990
16,3
1991
16,1
26,5
57,4
1992
15,8
57,8
1993
14,5 59
1994
15,3
26,6
58,1
1995
14,4
27,7
1996 14
58,3
1997
12,7
28,1
59,2
1998
13,4
27,6
1999
27,9
58,7
2000
13,1
27,8
2001
13,7
28,5
2002
29,3
56,9
2003
12,6
29,9

19. The Functions of Agriculture
Function 1: Provide food for humankind Malthus’ theory of the capacity of world to feed humankind: Geometric increase in human population vs. arithmetic increase in food poduction.

20. Function 2: Provide raw material for the industry
Function 3: Provide opportunity for rural lanscape
Function 4: Source for capital accumulation for development
Function 5: Source of labor for the industry

21. Why Does Agriculture’s Share Declines in Economic Development?
Inelastic income elasticity of demand for staple foods: as per capita income rises, declining proportion of household expenditure is devoted to food.
By Engel's law, as per-capita income rises, the proportion of income spent on food declines relative to other products.

22. As household demand for food declines in relation to other products, relative prices of foods decline, other things equal.
This in turn reduces returns to factors used in agricultural production, causing a net migration of labor and capital to other sectors.
 Share of agriculturen declines over the economic development process..

23. Almost always, agriculture declines
In employment share
In share of GDP or GNP (national income)
In share of consumer expenditure
Do farmers get poorer?
Are there fewer farmers?

24. Agricultural Policy
Policy is guiding principle leading to a course of action that is pursued by the government.
Policies and programs
Major forces for policy change:
Instability
Globalization
Technology
Food safety
Environmeny
Industrialization of agriculture
Politics
Unforseen events

25. What is Agricultural Policy?
A subset of public policy directed primarily but not exclusively at the farm and agribusiness sectors of society.

26. Agricultural policy applies to two markets:
1. AGRICULTURAL INPUT MARKETS
USE OF LAND AND OTHER NATURAL RESOURCES
AGRICULTURAL CREDIT AND FINANCE
LABOR
INDUSTRIAL PRODUCTS
2. AGRICULTURAL OUTPUT MARKETS
PRODUCTION
CONSUMPTION
MARKETING
INTERNATIONAL TRADE

27. Next week Read: Economic Importance of
Agriculture for Poverty Reduction
Answer the following questions:
What is the role of agriculture in poverty reduction?
What is the major research question in the paper?
What is the conclusion of the paper?