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Development Economics > Agricultural household models > Flashcards

Agricultural household models Flashcards

1
Q

why is agriculture important in agriculture
David Ricardo 1817

A
  • food
  • raw materials
  • supports investment in other sectors (savings and tax revenue)
  • industrialisation
  • increases the demand for other products
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2
Q

why is agriculture important in agriculture
Simon Kuznets

A
  • product contribution = without marketable surplus = food prices rise, increase wage bill, reduce profit, slow capital accumulation
  • market contribution = provides demand for other sectors
  • factor contribution = agriculture supplies labour and capital by savings and taxation
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3
Q

evidence that supports agricultural growth is important for poverty reduction

A
  1. reduces food prices
  2. increase farm employment - Mellor 10% output = 3-6% employment increase
  3. increase in nonfarm employment = multiplier effect - reduced imported foods = more local jobs
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4
Q

world bank quote on poverty

A

argicultre GDP growth is 2 times as effective in reducing poverty

  • main driver on reducing poverty in low and middle income countries
  • increasing crop yields by 10% recuses the number of African people living on less than 1 dollar a day by 9%
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5
Q

what is the neoclassical theory on farm production goal

A

to maximise profits
farmer is the individual decision maker - can vary inputs and outputs

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6
Q

what is profit maximising like in neoclassical farm model

A

produce where Marginal Value Product MVP = Marginal Factor Cost
- the marginal return of output = the marginal cost

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7
Q

what will happen if price of output increases in neoclassical farm model

A

farmers produce more
they consume less
make greater profit

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8
Q

why is the neoclassical farm model not a good model

A
  • not a true reflection of agricultural hhs
  • doesnt consider they are jointly engaged in consumption and production
  • not always their goal to maximise profits
  • tell from agricultral hh characteristics - profit maximisation is not their main goal
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9
Q

what are the characteristics of farm housholds

A

70% of population in developing countries are farm hhs
- dual nature = producer and consumer
- derive livelihoods from agriculture
- use family labour
- partial engagement in markets = only proprtion of output is sold - self provision in inputs - prices have seasonal cycle
- community = mutual insurance - can hold back entrepreunership

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10
Q

what is the Chayanov model

A
  • achieves more accurate represenatation of hh = dual nature
  • its predictive power relies on the demographics of the hh
  • explains decisions wrt the amount of family work supplied and income required to meet consumption
  • hhs care more about utility from leisure than income
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11
Q

who does the Chayanov model help explain

A
  • net surplus family farm
  • subsistence hh farm
  • sharecropper farms

doesnt explain
- big commercial farms - dont consume their output and rarely supply their own inputs

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12
Q

what are the assumptions needed for chayanov model

A

no market for labour
farm output can be kept or sold
access to land
minimum level of consumption

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13
Q

explain the graph Chayanov
TVP
IC
Subjective wage level

A
  1. production function = diminishing = response of output to varying input
  2. locus of leisure and income that give the same utility levels
  3. slope of IC = the subjective wage level = determined by family size = can very across hhs
  • Marginal utility of leisure and income tends to 0 = maximum labour and minimum consumption
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14
Q

at what levels do they produce at chayanav

A

when MPL = Subjective wage rate

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15
Q

what happens when increase the number of children in hh

A
  • the number of workers and production function stay the same
  • minimum consumption constraint rises
  • IC becomes shallower = MUL/MUY - they get more happiness from extra income = more mouths to feed
  • will accept smaller rise in income to compensate for loss of leisure
  • subject wage decreases = self exploitation
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16
Q

what happens to Chayanov model when introducing labour market
- hire labour in or out

A
  • level of farm output is not determined by subjective wage anymore - determined by profit maximisation with respect to wage rate
  • when IC is above profit maximising optimum = hire out
  • when IC is below = hire in
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17
Q

why is chanaynov a bad predictive model

A

only preductive power is on family size
- what about response to factors that affect PF

18
Q

what is the barnum and squire model

A

predicts responses of hh to changes in domestic and market variables such as ouput price, input price, wage rate, technology

19
Q

weakness of barnum and squire

A

Assumes competitive market
but developing countries dont live in environments with competitive markets

20
Q

assumptions needed for b and s

A

market for labour
land is fixed
home activities combined with leisure
sell and keep output
uncertainty is ignored
recursive = sequentially go through the choices that hhs make

21
Q

what is the profit effect

A

when farmers make more profit they feel more richer and can consume more of their own goods

profit effect role in determining the direction and strength of hh responses to changes in input and output prices

22
Q

what happens when market price of output rises

A
  • price ratio reduces = wage cost line shallower
  • rise in output
  • rise in full income = more output
  • rise in hired labour
  • decrease family work
  • decrease home consumption = increase in market sales
  • OR increase in home consumption = fall in market sales
23
Q

what is the standard neoclassical approach

A
  • increase in output price
  • shallower wage cost line
  • more output
  • more hired labour
  • less family labour
  • more income
  • reduced family consumption = because price has gone up
  • increased market sales
24
Q

what does fall / rise in marketed surplus depend on

A
  • the shape of the IC
  • will they increase or decrease consumption
25
Q

what happens to b and s when wage rate increases

A
  • price ration changes
  • wage cost line steeper
  • less output
  • less income
  • less hired labour
  • rise in family work
  • lower IC
    increase home consumtion
  • fall in market sales
26
Q

what are the subsititution effects at play when price of output increases

A
  • substitution effect in production =
  • increase price = increase ouput = total labour time – move B upwards
  • substitution effect in own consumption
  • increase price = less consumption - substitute it with lower priced goods
27
Q

what are the income effects at play when price of output increases

A
  • price increases
  • profits increase
  • full income increases
  • consume more of own good
28
Q

what are the subsititution effects at play when wage increases

A
  • increase in price ratio
  • increases relative cost of time for home work
  • use less hired labour
  • increase family labour
  • decrease in non farm time
29
Q

what are the profit effects at play when wage increases

A
  • increase in price ratio
  • less income
    -non farm time is a normal good
  • reduce non farm time
  • work more
30
Q

what is recursive property

A
  • can be solved in a sequential way
  • down to being a separable model
  • independence of production and consumption decisions in bands
31
Q

why does increase in prices and wage have different impacts depending on type of hh

A
  • is production less than consumption = NB
  • is labour supplies less than labour needed = Net employer
32
Q

when will increase in ouput price lead to increase in consumption

A

income effect outweights substitution effect
- they feel richer eat more
- even though they can make more profit off of it

33
Q

comparative statics of production

A

when price increases
we will ALWAYS produce more

by either hiring more labour or using more family labour

34
Q

comparative statics of consumption

A
  • higher staple price = eat less (sub)
  • higher staple price = more profit (income) = eat more
  • overall effect is ambiguous
  • depends on the slope of the hhs utility function and the magintude of profit effect
35
Q

comparative statics of labour

A
  • higher staple price
  • ALWAYS increases leisure demanded
  • hire more labour
36
Q

Singh Squire and Strauss empirical evidence
- estimated the magnitude of elasticities

A
  • looked at studies in 7 countries
  • increase in price of crop increases production
  • also revealed consumption effects from rise in crop price
  • 4/7 studies = the consumption effect was positive and large enough to decrease marketed surplus
  • this is bad for exporters and urban consumers
37
Q

Singh Squire and Strauss
increasing price by 10%
table results

A
  • for all price increase caused increase in consumption of market purchased goods = more income
  • 4/7 increased own consumption of food
  • all reduced labour supplied = richer
  • all marketed surplus increased - some inelastic and others elastic = large enough to offset profit effect
38
Q

Singh Squire and Strauss
increasing wage
table results

A
  • compared to traditional model = fewer sign changes - but change in magnitudes
  • traditional = wage increases = more income = more demand for goods = reduced labour supply
  • ag hh = partially offset by increase in wage bill, lowers income, demand dampened, positive labour supply
39
Q

how come in the Singh S S evidence - changes in prices have different effects on farm profits

A
  • Malaysia = increases consumption, Thailand = decreases
  • different countries price changes has different effects on farm profits
  • profits might be a small part of full income - so have less effect
  • share of profits in M = 0.5, T = 0.2 – will have bigger impact in M
  • effect of income on demand varies among commodities depending on the elasticity of the good
40
Q

agricultural model will not be very accurate if profits are

A
  1. relatively insensitive to producer prices
  2. small part of full income
  3. consumption of an item is relatively insensitive to full income
41
Q

what is a separable and non-separable model

A

separable
- assumes complete and perfectly competitive markets = recursive = B and S
- perfect market = can sell labour and get labour

non-separable
- market failures
- non tradable good
- shadow price

42
Q

when to use a hh model

A
  • when market failures are important = non-separable hh approach should be followed
  • if the width of the price band is small = can neglect market failures - wont be signifcantly misrepresented hh behaviour

Development Economics (5 decks)

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