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Terms of Trade and Supply Response of Indian Agriculture: Analysis in Cointegration Framework

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  • Surajit Deb

    (Ram Lal Anand College (Evening))

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    Abstract

    In this paper, we examine the presence of stochastic trend (unit root) and structural break in various agriculture-industry terms of trade series in India. The results suggest that underlying data generating process of terms of trade are most likely non-stationary. We subsequently re-examine the aggregate supply response of Indian agriculture in this light. We investigate the presence of long-run functional relationship(s) underlying the supply response model through cointegration analysis and error correction framework. The multivariate results indicate presence of a cointegrating relationship in the supply response model. The vector error correction estimates suggest that short-run output adjustments are not related to changes in agricultural terms of trade in a temporal causal relationship. However, the short-run deviations in terms of trade from its long-term level create error-correction in the long-term output adjustments through changes in technology (irrigation). This may imply that agricultural growth can respond better if price incentives are combined with investments in irrigation.

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    Bibliographic Info

    Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 115.

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    Length: 43 pages
    Date of creation: Mar 2003
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    Handle: RePEc:cde:cdewps:115

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    Keywords: domestic terms of trade; agricultural supply response; unit root; cointegration;

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