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

Surajit Deb
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Surajit Deb: Ram Lal Anand College (Evening)

No 115, Working papers from Centre for Development Economics, Delhi School of Economics

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.

Keywords: domestic terms of trade; agricultural supply response; unit root; cointegration (search for similar items in EconPapers)
JEL-codes: C22 C32 Q11 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2003-03
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Citations: View citations in EconPapers (1)

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