Inter-sectoral terms of trade and aggregate supply response in Gujarat and Indian agriculture
Abstract
In this paper we empirically investigate the role of inter-sectoral terms of trade in
determining the growth performance of agriculture in Gujarat and All India during the
period 1960-2011. Terms of trade reflects price signals and economic incentives for
producers and hence could be a determinant of supply response and growth
performance of agriculture and the whole economy. We identify structural breaks
endogenously in inter-sectoral terms of trade and analyse phase wise growth
performance in distinct periods in both Gujarat and all India. Empirical analysis supports
the hypothesis that favourable terms of trade for agriculture lead to a higher growth in
agriculture and the whole economy. The results show a strong evidence for positive
price elasticities of supply in agriculture and almost rules out the possibility of backward
bending supply curve. Favourable terms of trade for agriculture are an additional factor
for the high growth trajectory of Gujarat agriculture not emphasized in the literature.
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