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The impact of productivity growth on U.S. agricultural prices.

The Impact of Productivity Growth on U.S. Agricultural Prices

The U.S. agricultural sector has realized substantial productivity growth in recent years. Theoretically, this productivity growth should have a moderating influence on agricultural prices. Empirical examination of the quantitative impact of the increased labor productivity growth on food prices is not only important from the theoretical point of view, but it also has crucial implications to agricultural policy decision making. This note investigates the effects of labor productivity growth on U.S. agricultural prices. The investigation is conducted within the Granger causality testing framework.

Annual data ranging from 1948-88 are analyzed. The focus of the study is on the effects of labor productivity growth (PROD) on retail food prices (CPIF). Labor productivity is calculated as the ratio of the real gross farm product to total man-hours worked. Hsiao's [Journal of Monetary Economics, 1981] minimum final prediction error (FPE) causality testing method is used throughout all estimations. Having determined the optimum lag structure under the minimum FPE procedure, the causality implications are made upon the comparisons of the FPEs computed from the following equations:

(1) [Mathematical Expressions Omitted] (2) [Mathematical Expressions Omitted] (3) [Mathematical Expressions Omitted] (4) [Mathematical Expressions Omitted]

The FPEs of equations (1) - (4) are as follows: 0.1081, 0.1051, 0.6274, and 0.6538. Causality implications are based upon the comparisons of the FPEs of the univariate and bivariate specifications. If the FPE of the bivariate specification is less than that of the univariate specification, then a causal flow exists from the independent to the dependent variable. In the present case of equations (1) and (2), the existence of a causal flow from PROD to CPIF is evident. The comparison of the FPEs of equations (3) and (4) indicates whether the causal flow is unidirectional or bidirectional. In the present case, this flow is unidirectional from PROD to CPIF.

The minimum FPE causality test results indicate that labor productivity growth has had statistically significant causal impact on retail level agricultural prices. In order to determine the direction of this impact and its magnitude, the lagged productivity term in equation (2) was examined. The coefficient of this variable was -0.117. This coefficient indicates that labor productivity growth has had a strong negative impact on retail level agricultural prices with a one-year lag. It implies that a 1 percent increase in the labor productivity growth will cause an approximately 0.1 percent decline in agricultural prices. From an agricultural policy point of view, it appears that exogenous factors, such as labor productivity growth, have an important influence on agricultural prices. This influence should be taken into consideration when pricing decisions are made.

PETER J. SAUNDERS Central Washington University

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Title Annotation:Anthology
Author:Saunders, Peter J.
Publication:Atlantic Economic Journal
Date:Sep 1, 1991
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Next Article:Optimal pricing under uncertainty.

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