International supply response

Abstract

Long-run aggregate agricultural supply elasticities obtained from conventional supply functions fitted to time series data tend to be relatively inelastic in the range of 0.1 to 0.4. I argue that these estimates substantially understate the true long-run supply response in agriculture. Because of the lack of international input price data, implicit output/input price ratios are estimated from a production function assuming profit maximization. The estimation of an aggregate supply function utilizing these price ratios yields long run aggregate supply elasticities in the range of 0.90 to 1.19. These figures are substantially larger than those obtained from conventional supply functions fitted to time series data, but correspond closely to estimates reported in an earlier cross-country study that used different price data for different points in time. The results imply that policies which distort domestic and/ or world market prices of agricultural products cause greater output distortions in both the DCs and LDCs than are predicted by the small supply elasticities obtained from conventional supply estimation.