macroeconomic policy and agriculture

MacroeconomicPolicy and Agriculture

Chapter 15

Page 357

Can macroeconomic policy affect agriculture? Sure! The aboveheadline from the front page of the Des Moines Register in 1984described the financial stress caused by double digit interest ratesused by the Fed to bring inflation under control.

Can macroeconomic policy affect agriculture? Sure! The aboveheadline from the front page of the Des Moines Register in 1984described the financial stress caused by double digit interest ratesused by the Fed to bring inflation under control.

Macro

AD ASCPI

GDP

Macro to Micro Linkages for AgricultureMacro to Micro Linkages for Agriculture

Equilibrium in the national

product market

Equilibrium in the national

product market

Macro Market

AD ASCPI

GDP

PCORN

QCORN

DS

Macro to Micro Linkages for AgricultureMacro to Micro Linkages for Agriculture

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC

Macro to Micro Linkages for AgricultureMacro to Micro Linkages for Agriculture

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

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

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

Page 372

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

Page 373

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 …

Page 374

Recall the policy impacts on the general

economy

Page 358

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.

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.

AI

Effects of Expansionary Monetary PolicyEffects of Expansionary Monetary Policy

Interest rates fallInterest rates fall

AI

Effects of Expansionary Monetary PolicyEffects of Expansionary Monetary Policy

Interest rates fallInterest rates fall

Investment growsInvestment grows

AI

Effects of Expansionary Monetary PolicyEffects of Expansionary Monetary Policy

Interest rates fallInterest rates fall

Investment growsInvestment grows

Gap closes with some inflation

Gap closes with some inflation

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Expansionary Macro PolicyImpact of Expansionary Macro Policy

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

MC

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

Page 358

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.

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.

Effects of Contractionary Monetary PolicyEffects of Contractionary Monetary Policy

Interest rates riseInterest rates rise

Effects of Contractionary Monetary PolicyEffects of Contractionary Monetary Policy

Interest rates riseInterest rates rise

Investment fallsInvestment falls

Effects of Contractionary Monetary PolicyEffects of Contractionary Monetary Policy

Interest rates riseInterest rates rise

Investment fallsInvestment falls

Gap closes with less inflation

Gap closes with less inflation

Let’s look at policy impacts on the Ag

sector

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Contractionary Macro PolicyImpact of Contractionary Macro Policy

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

MC

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

Page 358

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.

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.

Effects of Expansionary Fiscal PolicyEffects of Expansionary Fiscal Policy

Taxes cutDeficit rises

Taxes cutDeficit rises

Effects of Expansionary Fiscal PolicyEffects of Expansionary Fiscal Policy

Taxes cutDeficit rises

Taxes cutDeficit rises

Consumption risesConsumption rises

Effects of Expansionary Fiscal PolicyEffects of Expansionary Fiscal Policy

Taxes cutDeficit rises

Taxes cutDeficit rises

Consumption risesConsumption rises

Gap closes with more inflation

Gap closes with more inflation

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Expansionary Macro PolicyImpact of Expansionary Macro Policy

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

MC

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

Page 358

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.

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.

Effects of Contractionary Fiscal PolicyEffects of Contractionary Fiscal Policy

Taxes raisedDeficit falls

Taxes raisedDeficit falls

Effects of Contractionary Fiscal PolicyEffects of Contractionary Fiscal Policy

Taxes raisedDeficit falls

Taxes raisedDeficit falls

Consumption fallsConsumption falls

Effects of Contractionary Fiscal PolicyEffects of Contractionary Fiscal Policy

Taxes raisedDeficit falls

Taxes raisedDeficit falls

Consumption fallsConsumption falls

Gap closes with less inflation

Gap closes with less inflation

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC

Impact of Contractionary Macro PolicyImpact of Contractionary Macro Policy

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

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

Impacts on economic well being

Price

Quantity

Consumersurplus

Consumersurplus

Producersurplus

Producersurplus

Measuring Economic Well-Being

1

2

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?

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

ATC

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

MC

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

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

ATC

Price

Quantity

Measuring Economic Well-Being

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

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?

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

ATC

Macro Market Micro

AD ASCPI

GDP

PCORN

QCORN

$

Output

DS

Impact of Contractionary Macro PolicyImpact of Contractionary Macro Policy

Equilibrium in the national

product market

Equilibrium in the national

product market

Equilibrium in the national corn

market

Equilibrium in the national corn

market

Equilibrium for Gary Corngrower

in Texas

Equilibrium for Gary Corngrower

in Texas

qcorn

MC

Price

Quantity

Measuring Economic Well-Being

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

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.

Chapter 16 begins our focus on international trade….