An equilibrium displacement approach to analyzing the effects of tariff reduction on farmers’ profits

Abstract

Purpose The purpose of this paper is to develop an equilibrium displacement model (EDM) that is able to evaluate the impacts of a free trade agreement (FTA) on the profits of farmers. Empirical applications of the developed EDM are performed for evaluating the influences of Korea-Chile FTA on the grape industry in Korea. Design/methodology/approach Supply and demand equations together with profit function of individual farmers are converted into log-differential forms that compose the EDM. The cost function of grape producers is estimated for deriving the parameters that are required in applying the developed EDM. Findings The share of profit within revenue and the elasticity of cost with respect to quantity in the cost function play key roles in assessing the change in farmers’ profit. The empirical assessment of the effects of Korea-Chile FTA indicates that this FTA has little impact on the Korean grape market and grape producers in Korea. Originality/value Usefulness of the existing EDM has been limited in evaluating the impacts of exogenous shocks on the individual farmer level. This paper fills this gap by developing an EDM that assesses the impacts of tariff reduction on farm-level profit.