Inter-sectoral terms of trade and aggregate supply response ingujarat and Indian agriculture

Abstract

This paper empirically investigates the role of inter-sectoral terms of trade in determining the growth performance of agriculture in Gujarat and all of India during the period 1960-2011. Structural breaks endogenously identified in inter-sectoral terms of trade and phase wise growth performance in distinct periods in both Gujarat and all of India is analysed. Empirical findings support the hypothesis that favourable terms of trade for agriculture lead to higher growth in agriculture. The results show a strong evidence for positive price elasticity of supply in agriculture and almost rules out the possibility of backward bending supply curve. The paper establishes favourable terms of trade as a major factor for achieving high growth in agriculture.