International Supply Response

Abstract

Peterson, W., 1988. International supply response. Agric. Aeon., 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 crosscountry 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.

Applied General Equilibrium Analysis of Agricultural and Resource Policies

“…Using factor demand relationships he estimated a long run supply elasticity for U.S. agriculture to be between 1.2 and 1.3. (This is quite close to the cross-section estimate by Peterson (1988) of 1.19.) Hertel (1989) generalized the indirect approach to estimation of supply response to the case of multiple, quasi-fixed factor, and a fully flexible production technology.…”

“…The second group is in fixed v supply with cost share C . In this case, the sector of supply elasticity may be computed as: estimate, such as that from the cross-section study of Peterson (1988), and combine this with the benchmark equilibrium values for C and C and to obtain . The problem with this approach is that v F varies as a function of relative prices, (provided 1).…”

“…These indirect estimates of supply response are all considerably larger than those obtained using single equation models fitted to time series data. Such studies have generally yielded aggregate agricultural supply elasticities in the range of 0.1 to 0.4 (Peterson, 1988). In such an environment output subsidies look a lot like lump sum transfers!…”

Capital accumulation and the growth of aggregate agricultural production

“…In his review of estimated own price supply elasticities, Peterson (1988) reported that most estimates range between 0.1 and 0.4. Peterson argued that these low estimates were a result of using times series data which overstated expected price variation.…”