Supply response analysis of tobacco growers in Khyber Pakhtunkhwa: An ARDL approach

Abstract

This study estimated the supply response of tobacco growers to price and non-price variables in Khyber Pakhtunkhwa by using Auto Regressive Distributed Lags (ARDL) approach. The study used time series data for the time period of 1981–2014. Augmented Dicky Fuller (ADF) test was employed to check order of integration of all the variables which found a mixture of stationarity of variables. Bounds test confirmed the existence of long run relationship between variables. Therefore ARDL approach was used for the estimation of short run and long run elasticities. The estimated short run elasticities of lagged production, tobacco price, tobacco area were positive and statistically significant while that of wheat price (competing crop) was negative and statistically significant. The estimated value of error correction term which measures the speed of adjustment was −0.61; implies that any shock to the system returns back to its equilibrium by 61 percent each year. The estimated long run elasticities of tobacco price and tobacco area were positive and statistically significant while that of wheat price (competing crop) was negative and statistically significant. It can be concluded that tobacco growers are responsive towards price variable in the long run therefore an increase in tobacco price will boost up tobacco production in the country. In short run, allocation of more area to tobacco crop is a tool for enhancing tobacco production.