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Macroeconomic Policy and Agriculture

Macroeconomic Policy and Agriculture. Chapter 15. Can macroeconomic policy affect agriculture? Sure! The above headline from the front page of the Des Moines Register in 1984 described the financial stress caused by double digit interest rates

norman-riggs
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Macroeconomic Policy and Agriculture

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  1. MacroeconomicPolicy and Agriculture Chapter 15

  2. Can macroeconomic policy affect agriculture? Sure! The above headline from the front page of the Des Moines Register in 1984 described the financial stress caused by double digit interest rates used by the Fed to bring inflation under control. Page 357

  3. Macro to Micro Linkages for Agriculture Macro CPI AD AS GDP Equilibrium in the national product market

  4. Macro to Micro Linkages for Agriculture Macro Market CPI PCORN D AD AS S GDP QCORN Equilibrium in the national corn market Equilibrium in the national product market

  5. Macro to Micro Linkages for Agriculture Macro Market Micro CPI PCORN D $ MC AD AS S GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  6. Macro trends contributing to the farm financial crisis in the early-1980s Page 372

  7. Drop in real net farm income and higher real interest rates led to declines in farm land values Page 373

  8. As real net farm incomes declined and real interest rates rose, investment expenditures fell sharply. Outlays for operating inputs also declined. General economy was in much better shape … Page 374

  9. Recall the policy impacts on the general economy

  10. This table summarizes the impacts that expansionary and contractionary monetary and fiscal policy have upon key variables that can have a distinct effect on the financial health of farm operator families. Page 358

  11. Effects of Expansionary Monetary Policy Interest rates fall AI

  12. Effects of Expansionary Monetary Policy Interest rates fall AI Investment grows

  13. Effects of Expansionary Monetary Policy Interest rates fall Gap closes with some inflation AI Investment grows

  14. Impact of Expansionary Macro Policy Macro Market Micro CPI PCORN D $ AD AS S MC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  15. Expansionary monetarypolicy impacts: • Ag commodity prices in general = Higher • Interest expenses = Lower • Net farm incomes = Higher • Farmland prices = Higher

  16. This table summarizes the impacts that expansionary and contractionary monetary and fiscal policy have upon key variables that can have a distinct effect on the financial health of farm operator families. Page 358

  17. Effects of Contractionary Monetary Policy Interest rates rise

  18. Effects of Contractionary Monetary Policy Interest rates rise Investment falls

  19. Effects of Contractionary Monetary Policy Interest rates rise Gap closes with less inflation Investment falls

  20. Let’s look at policy impacts on the Ag sector

  21. Impact of Contractionary Macro Policy Macro Market Micro CPI PCORN D $ AD AS S MC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  22. Contractionary monetarypolicy impacts: • Ag commodity prices in general = Lower • Interest expenses = Higher • Net farm incomes = Lower • Farmland prices = Lower

  23. This table summarizes the impacts that expansionary and contractionary monetary and fiscal policy have upon key variables that can have a distinct effect on the financial health of farm operator families. Page 358

  24. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises

  25. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises Consumption rises

  26. Effects of Expansionary Fiscal Policy Taxes cut Deficit rises Gap closes with more inflation Consumption rises

  27. Impact of Expansionary Macro Policy Macro Market Micro CPI PCORN D $ AD AS S MC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

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

  29. This table summarizes the impacts that expansionary and contractionary monetary and fiscal policy have upon key variables that can have a distinct effect on the financial health of farm operator families. Page 358

  30. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls

  31. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls Consumption falls

  32. Effects of Contractionary Fiscal Policy Taxes raised Deficit falls Gap closes with less inflation Consumption falls

  33. Impact of Contractionary Macro Policy Macro Market Micro CPI PCORN D $ AD AS S MC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

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

  35. Impacts on economic well being

  36. Measuring Economic Well-Being Price Consumer surplus 1 Producer surplus 2 Quantity

  37. What Can We Say About Gary’s Business? Macro Market Micro CPI PCORN D $ AD AS S MC ATC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  38. What Can We Say About Gary’s Business? Macro Market Micro CPI PCORN D $ AD AS S MC ATC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  39. Measuring Economic Well-Being Price Consumer surplus? Before = 1+2 After = 1+5 Gain = 5 – 2 5 1 4 2 Producer surplus? Before = 3 After = 2+3+4 Gain = 2+4 3 Quantity

  40. What Can We Say About Gary’s Business? Macro Market Micro CPI PCORN D $ AD AS S MC ATC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  41. Impact of Contractionary Macro Policy Macro Market Micro CPI PCORN D $ AD AS S MC GDP QCORN qcorn Output Equilibrium in the national corn market Equilibrium for Gary Corngrower in Texas Equilibrium in the national product market

  42. Measuring Economic Well-Being Price Consumer surplus? Before = 1+5 After = 1+2 Loss = 2 – 5 5 1 4 2 3 Producer surplus? Before = 2+3+4 After = 3 Loss = 2+4 Quantity

  43. Summary • Know 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.

  44. Chapter 16 begins our focus on international trade….

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