Summary Economics of Agribusiness

-
256 Flashcards & Notes
0 Students
  • This summary

  • +380.000 other summaries

  • A unique study tool

  • A rehearsal system for this summary

  • Studycoaching with videos

Remember faster, study better. Scientifically proven.

This is the summary of the book "Economics of Agribusiness". The author(s) of the book is/are Gardebroek & Peerlings. This summary is written by students who study efficient with the Study Tool of Study Smart With Chris.

Summary - Economics of Agribusiness

  • 1 Position of agriculture and agribusiness within the economy

  • Agriculture and horticulture are defined as the sum of industries producing agricultural and horticultural products. Industries exist of firms producing similar products with a similar technology.

  • Agribusiness based on domestically produced raw products includes agriculture and horticulture, direct and indirect agricultural input delivering industries and processing industries in the first stage of processing.

     

  • Industries are defined as firms or part of firms that produce similar products using a similar technolog.

  • Agricultural production chain refers to all production stages of an agricultural or food product form resources to consumer

  • Net Value Added is the sum of the rewards of the production factors or factor inputs labour, capital and  land used in production. If capital depreciation is added to NVA we speak of Gross Value Added. The sum of NVA of all industries in an economy gives the Net Domestic Product. Adding capital depreciation gives Gross Domestic Product. If the net primary incomes earned abroad is added to NDP we get Net National Income.

     

  • Over time agricultural NVA is relatively decreasing compared to agricultural production. This is caused by

    1. Differentiation in the agricultural production column. Differentiation is dividing the production process vertically. The opposite process is called integration. Specialisation is dividing the production process horizontally. The opposite of specialisation is diversification.
    2. The relatively high productivity increases in agriculture.
    3. Specific factors strongly influencing this general picture are price changes of individual inputs, the agricultural products produced, agricultural policies, and negative revenues of by-products
  • Production of food equals the output of the production column till the consumer and buyer of exported products.

  • Self-sufficiency for food is defined as food production divided by food consumption

  • The empirical based Engel's Law indicates that an increase in income, and thus an increase in consumer expenditure and consumption, will result in a less than proportional increase of food consumption per capita

  • NDP is the income available in the economy. NDP is spent on 'final demand'that consists of consumer expenditure, public (government) expenditure, investment and exports.

  • Agriculture and horticulture are relatively unimportant if we look at share in national income and employment. Moreover, the importance over time is decreasing. If we take the agribusiness as a whole into account then the importance is larger
  • The Dutch agribusiness is a relatively large exporter of agricultural and food products
  • Agriculture and horticulture are important as producers of a lare amount of emissions and as land users and landscape producers

  • GDP is the sum of gross value added of all industries (including the government). So it is the 
    reward for the use of factor inputs (labour, land and capital). It is both a measure for income as 
    production (production realised with factor inputs). 

  • Three drawbacks of GDP as a welfare measure. 
    • Gross Domestic Product does not take into account external effects, both positive (e.g. beautiful scenery) and negative (e.g. pollution). 
    • Gross Domestic Product does not take into account non-valued production like taking care of your own children or parents and cleaning the own house. 
    • Gross Domestic Product does not take into account the income distribution between people although this distribution is important (e.g. think of social security benefits). 
    • Gross Domestic Product is not a good measure for utility. Income is a constraint in maximising utility but not a goal in itself (e.g. a millionaire in the desert without water is rich but is well-being is poor)

  • An external effect is production that is not priced. External effects can be caused by production 
    (e.g. bad smell as a result of chocolate production) and consumption (e.g. emission of CO2 as a 
    result of heating the houses). 

  • Without government intervention, the quantity of a commodity of which the production causes a positive externality, is below the social optimum.

  • Production of ‘agribusiness based on domestically produced raw products’ in the Netherlands equals the production that would disappear if there would be no longer agricultural production in the Netherlands. 
  • What is meant by GDP?
    GDP is the sum of gross value added of all industries (including the government). So it is the 
    reward for the use of factor inputs (labour, land and capital). It is both a measure for income as 
    production (production realised with factor inputs). 

  • If Dutch agriculture would stop its production (so agricultural production equals 0) would that imply that the GDP in the Netherlands decreases with 1.6%?
    No, Gross Domestic Product would decrease more because input-delivering and output-processing industries would also be affected. In the longer term with perfect working factor markets production factors would be employed somewhere else in the economy and the decrease could be smaller

  • Mention three drawbacks of GDP as a welfare measure. 
    - Gross Domestic Product does not take into account external effects, both positive (e.g. beautiful scenery) and negative (e.g. pollution). 
    • Gross Domestic Product does not take into account non-valued production like taking care of your own children or parents and cleaning the own house. 
    • Gross Domestic Product does not take into account the income distribution between people although this distribution is important (e.g. think of social security benefits). 
    • Gross Domestic Product is not a good measure for utility. Income is a constraint in maximising utility but not a goal in itself (e.g. a millionaire in the desert without water is rich but is well-being is poor).
  • What are external effects?
    An external effect is production that is not priced. External effects can be caused by production (e.g. bad smell as a result of chocolate production) and consumption (e.g. emission of CO2 as a result of heating the houses).
  • Mention two positive external effects and two negative external effects.
    Positive external effects: landscape and CO2 that make plants grow faster in agriculture (it is also a negative external effect because it contributes to global warning). 
    Negative external effects: bad smell and ammonia emissions. 


  • To curb down negative external effects local, national, international and global policies are implemented. What determines the optimal level (local, national, etc.)? 
    The optimal level is determined by the level at which the negative effects are produced and the negative effects occur. These levels do not have to be equal. For example, most CO2 emissions are produced in developed countries while the whole world is affected by the greenhouse effect that is caused by these emissions. 

  • If emissions of a pollutant are taxed what are then the effects for the level of pollution?
    Emissions would be reduced. The tax would be internalised in the price of the product(s) of which the pollutant is an external effect. For example, to produce steel a lot of coal is used. This causes the emission of CO2 . Taxing CO2 emissions would lead to a price increase of steel and therefore to less CO2 production.
  • Which economic agents value a beautiful landscape positively?
    Consumers value a beautiful landscape positively. In general consumers who recreate in the countryside and consumers with a high income value landscape most
  • Contributes a beautiful landscape to national income?
    A beautiful landscape does not affect national income. Landscape production (e.g. planting trees or digging ponds) involves normal production activities and therefore contributes to national income. 
  • How could a beautiful landscape be expressed in money terms?
    There are a couple of ways. First, a beautiful landscape could be sold by means of entrance fees for e.g. national parks or tourist taxes to be paid at e.g. camping sites. Second, one could try to find out what consumers are willing to pay for a certain landscape by means of a survey. This willingness to pay could be an indicator of the level of subsidies for the creation or 
    maintenance of certain landscapes. Third, one could look at the costs of creating a certain landscape. Fourth, by looking at the price difference between similar properties (houses) with and without a view on a beautiful landscape one gets a value of the landscape (so-called hedonic pricing). Finally, one could determine the travel cost of the people visiting a certain 
    beautiful site. These cost are an indication of the value of that site (so-called travel cost method).
Read the full summary
This summary. +380.000 other summaries. A unique study tool. A rehearsal system for this summary. Studycoaching with videos.

Latest added flashcards

Give the different forms of economic integration and rank them in order of increasing integration. 
- Free trade zone
- Customs union
- Common market
- Economic union
- Economic and Monetary union
- Political union
Mention and shortly discuss two disadvantages of the percentage PSE as protection measure. 
Use of current world market prices (pw) to calculate protection measures is rather arbitrary. For a country with small sales and purchases on the world market (small country assumption) it can be assumed that the world market price remains constant in a situation of unilateral trade liberalisation but not in case of multilateral trade liberalisation. If the small country assumption is not valid then world market prices change also in the case of unilateral trade liberalisation. The %PSE therefore is mainly important as relative measure; which country has the highest level of protection. Another assumption made is that constant quantities are supposed by calculating the %PSE. Therefore changes in quantity due to trade liberalisation are not taken into account. 

Many consumers in the Netherlands believe the introduction of the euro increased their cost of living. There are some explanations for this (perceived) higher cost of living. The first would be money illusion. The second would be that the Netherlands devaluated de facto its currency. Discuss how both explanations lead to the (perceived) higher cost of living. 
Money illusion means that demand is not homogenous of degree zero in prices and income. This implies that if all prices and income are multiplied by the factor 0.4537802 (conversion rate from guilders into euro) then demand is changing. With a factor smaller than 1 consumers observe lower prices and start spending more money (demand increases). At the end of the month they run out of money and complain that everything has become more expensive. The increase in demand also leads to higher prices. 
A devaluation of the currency means that exporting becomes more attractive (world market prices in domestic currency increase). However, imports increase also in price. Both the fact that there is less products available (more is exported) and the higher import prices lead to higher domestic prices. This can also result in higher wage demands increasing the cost of production leading to even higher prices. 
If this country would be large (the small country assumption does not apply) how would an appreciation and a depreciation affect the world market price expressed in dollar/kg? 
With appreciation the decrease in world market price expressed in euro/kg leads to lower exports or larger imports. Both have a positive effect on the world market price expressed in dollar/kg. With depreciation the increase in world market price expressed in euro/kg leads to higher exports or smaller imports. Both have a negative effect on the world market price expressed in dollar/kg. 
Give the definition of the exchange rate. 
The exchange rate is the price of one currency unit of the rest of the world expressed in the domestic currency
What is meant by institutional factors?
Institutional factors refer to how institutions function. Institutions are market, property right structure, government policy, judicial system, etc. 

What are internal and external economies of scale?
Internal economies of scale: the costs per unit of production decrease if production increases. 
External economies of scale: the costs per unit of production decrease if a firm functions within a large complex (cluster). Costs are lower if the industry is larger. 

What is a terms of trade gain?
Terms of trade gain. The removal of price support implies that export subsidies no longer have to be paid. Terms of trade refers to the change in world market price compared to the domestic price.
What are allocation gains (or deadweight gains)?
Allocation gains. Removing the price distortions in the economy makes that 
production factors are used in those places where they get the highest return (reward). The welfare gain from moving from the inefficient to the efficient allocation is called allocation gain. There are allocation gains on the demand side and production side. 

What is the ‘small country hypothesis’?
The small country assumption states that changes in demand and supply in a country do not affect the world market price. If the small 
country assumption applies the world market price is given and constant.