Impacts of the Exchange Rate Changes on Agriculture: Profit Function Approach and Implications for Korean Hog Industry

The effects of exchange rate changes on agricultural markets are examined theoretically and empirically. Unlike the conventional approach simply using excess supply and demand, profit function is used in a partial equilibrium setting. This approach has an advantage over the traditional one in that it can examine the exchange rate effects on input markets explicitly and provide strong theoretical underpinnings for the analytical framework in this area. The effects on output and input prices, production, profit and trade are examined by exploring a theoretical framework from profit function. Theoretical analysis shows that the price elasticities with respect to the exchange rate may exceed one in absolute values, which contradicts to most previous works. However, the results of empirical simulation for Korean hog industry show that such perverse case can seldom happen in reality, supporting the previous results. An important implication for Korean hog industry policy from this study is that the import dependency in inputs needs to be reduced to improve welfare.