Applying recent estimates of total factor productivity (TFP) growth on Australian sheep farms, we analyse the long-run effects of TFP growth on the world wool market using a detailed model of the world wool market that treats raw wool, wool textiles and wool garments as heterogeneous commodities. The model divides the world wool market into nine regions and eight major industrial sectors capturing the extreme nature of the multistage production system through which wool passes. We find that regional sheep producer's welfare responds by between -0.9 per cent and 0.7 per cent assuming conservative TFP growth over the period 1995/96-2003/04. Sensitivity analysis shows the welfare effects to be robust with respect to all model parameters, but sensitive to the size of the TFP growth and the degree of TFP spill-over. Our realistic representation of the multistage nature of the wool production system shows that wool inputs steadily decline in importance in moving from early- to late-stage processing. This production structure indicates that the productivity of sheep farmers has little effect on the prices of and demand for wool garments. In contrast, trade in wool inputs is very responsive to the productivity of sheep farmers. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd/University of Adelaide and Flinders University .
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