agri 2312 chapter 15 macroeconomic policy and agriculture

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward

© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights

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MacroeconomicPolicy and Agriculture

Chapter 15



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Page 306

Macro trends contributing to the farm financial crisis in the early-1980s

Macro trends contributing to the farm financial crisis in the early-1980s



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07

Drop in real net farmincome and higherreal interest rates ledto declines in farmland values

Drop in real net farmincome and higherreal interest rates ledto declines in farmland values



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Page 308

As real net farm incomesdeclined and real interestrates rose, investmentexpenditures fell sharply.Outlays for operating inputsalso declined.

As real net farm incomesdeclined and real interestrates rose, investmentexpenditures fell sharply.Outlays for operating inputsalso declined.

General economy was in much better shape …

General economy was in much better shape …



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Recall the policy impacts on the general

economy



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Page 294

This table summarizes the impacts that expansionaryand contractionary monetary and fiscal policy haveupon key variables that can have a distinct effect on thefinancial health of farm operator families.




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AI

Effects of Expansionary Monetary PolicyEffects of Expansionary Monetary Policy

Interest rates fallInterest rates fall



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AI



Investment growsInvestment grows



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AI



Investment growsInvestment grows

Gap closes with some inflation

Gap closes with some inflation



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Page 294





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Effects of Contractionary Monetary PolicyEffects of Contractionary Monetary Policy

Interest rates riseInterest rates rise



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Investment fallsInvestment falls



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Investment fallsInvestment falls

Gap closes with less inflation




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Page 292





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Effects of Expansionary Fiscal PolicyEffects of Expansionary Fiscal Policy

Taxes cutDeficit rises




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Consumption risesConsumption rises



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Consumption risesConsumption rises

Gap closes with more inflation




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Spending raisedDeficit rises




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Page 292





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Effects of Contractionary Fiscal PolicyEffects of Contractionary Fiscal Policy

Taxes raisedDeficit falls




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Consumption fallsConsumption falls



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Spending cutDeficit falls




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Let’s look at policy impacts on the Ag

sector



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Macro

AD ASCPI

GDP

Macro to Micro Linkages for AgricultureMacro to Micro Linkages for Agriculture

Equilibrium in the national

product market


product market



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Macro Market

AD ASCPI

GDP

PCORN

QCORN

DS



product market


product market

Equilibrium in the national corn

market


market



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC



product market


product market


market


market

Equilibrium for Gary Corngrower

in Texas


in Texas

qcorn



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Page 294



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Expansionary Macro PolicyImpact of Expansionary Macro Policy


product market


product market


market


market


in Texas


in Texas

qcorn

MC



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Expansionary monetaryExpansionary monetary policy impacts:•Ag commodity prices in general = Higher•Interest expenses = Lower •Net farm incomes = Higher•Farmland prices = Higher

Expansionary monetaryExpansionary monetary policy impacts:•Ag commodity prices in general = Higher•Interest expenses = Lower •Net farm incomes = Higher•Farmland prices = Higher



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Page 294



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Contractionary Macro PolicyImpact of Contractionary Macro Policy


product market


product market


market


market


in Texas


in Texas

qcorn

MC



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Contractionary monetaryContractionary monetary policy impacts:•Ag commodity prices in general = Lower•Interest expenses = Higher•Net farm incomes = Lower•Farmland prices = Lower

Contractionary monetaryContractionary monetary policy impacts:•Ag commodity prices in general = Lower•Interest expenses = Higher•Net farm incomes = Lower•Farmland prices = Lower



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Page 294



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Expansionary Macro PolicyImpact of Expansionary Macro Policy


product market


product market


market


market


in Texas


in Texas

qcorn

MC



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ExpansionaryExpansionary fiscal policy impacts:•Ag commodity prices in general = Higher•Interest expenses = Higher•Net farm incomes = Higher•Farmland prices = Somewhat higher

ExpansionaryExpansionary fiscal policy impacts:•Ag commodity prices in general = Higher•Interest expenses = Higher•Net farm incomes = Higher•Farmland prices = Somewhat higher



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Page 294



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC



product market


product market


market


market


in Texas


in Texas

qcorn



Reserved.

ContractionaryContractionary fiscal policy impacts:•Ag commodity prices in general = Lower•Interest expenses = Lower•Net farm incomes = Lower•Farmland prices = Somewhat lower

ContractionaryContractionary fiscal policy impacts:•Ag commodity prices in general = Lower•Interest expenses = Lower•Net farm incomes = Lower•Farmland prices = Somewhat lower



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Impacts on economic well being



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Price

Quantity

Consumersurplus

Consumersurplus

Producersurplus

Producersurplus

Measuring Economic Well-Being

1

2



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC

What Can We Say About Gary’s Business?What Can We Say About Gary’s Business?


product market


product market


market


market


in Texas


in Texas

qcorn

ATC



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC


product market


product market


market


market


in Texas


in Texas

qcorn


ATC



Reserved.

Price

Quantity


1

2

3

5

4

Consumersurplus?Before = 1+2After = 1+5Gain = 5 – 2

Consumersurplus?Before = 1+2After = 1+5Gain = 5 – 2

Producersurplus?Before = 3After = 2+3+4Gain = 2+4

Producersurplus?Before = 3After = 2+3+4Gain = 2+4



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Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC



product market


product market


market


market


in Texas


in Texas

qcorn

ATC



Reserved.

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS



product market


product market


market


market


in Texas


in Texas

qcorn

MC



Reserved.

Price

Quantity


1

2

3

5

4

Consumersurplus?Before = 1+5After = 1+2Loss = 2 – 5

Consumersurplus?Before = 1+5After = 1+2Loss = 2 – 5

Producersurplus?Before = 2+3+4After = 3Loss = 2+4

Producersurplus?Before = 2+3+4After = 3Loss = 2+4



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SummaryKnow the direction of affects that expansionary and

contractionary monetary and fiscal policy have on key macro variables, including interest rates, inflation and unemployment.

Know the affects that expansionary and contractionary monetary and fiscal policy have on key Ag sector variables, including farm product prices, farmland values and farm input sales.

Understand the implications for consumer and producer surplus.



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Chapter 16 begins our focus on international trade….

agri 2312 chapter 15 macroeconomic policy and agriculture

Technology

macro market ad

macro market micro ad

macro ad

agriculture equilibrium

cpi gdp macro

macro trends

higher net farm incomes

output d s mc macro