Effects of real exchange rate changes on Canadian agriculture: A general equilibrium evaluation

Abstract

In this paper a computable general equilibrium model of the Canadian economy with a disaggregated agricultural sector was constructed and calibrated for 1984 base-year data. The model included agricultural and non-agricultural prices, trade, incomes, demands for inputs and outputs. The model was solved using the General Algebraic Modeling Systems (GAMS) language. The price, quantity and income effects of exchange-rate changes on Canadian agricultural sectors were analyzed by shocking the exchange rate under different simulations. The results obtained in the study indicate that exchange-rate changes have important consequences for Canadian agriculture. These effects can be summarized as fluctuation of prices, sectoral outputs, factor incomes, and agricultural household incomes. The devaluation of the dollar would change the relative prices between agricultural and non-agricultural sectors of the economy. There would be an improvement in terms of trade in favor of agricultural sectors. Hence, return to factors of production in agricultural sectors would increase, and agricultural sectors would have a tendency to pull mobile factors of production from other sectors. This, in turn, would mean an increase in the factor incomes in agricultural sectors. General equilibrium results indicated that overall the agricultural sectors would gain from a devaluation, but the effects on various sectors of the economy would be quite different. It is also found that revaluation of the Canadian dollar would harm the agricultural households through decreased prices, outputs, and incomes. These results indicate that exchange-rate and macroeconomic policy changes may be one of the causes of agricultural price and income instability in Canada.