Agricultural Productivity and Trade: Argentina and the USA

Abstract

We study labor productivity in agriculture within a two-region, two factor and two commodity economy. Increases in productivity can lead to higher or to lower agricultural prices, depending on the internal structure of the economy. We give necessary and sufficient conditions for either outcome; these depend on technologies, factor endowments and export levels. In a developing economy, improvements in productivity generally lead to higher agricultural prices, i.e. to better terms of trade between agriculture and industry. In an industrial economy increasing productivity leads instead to lower agricultural prices. The sign of one expression determines the turning point between these two opposite price responses and allows us to explain the effects of trade and investment policies on domestic output and welfare. Simulations of the model are reported with data for Argentina and the U.S.A. circa 1970.