Measuring the Impact of Agricultural Production Shocks on International Trade Flows

• Agricultural Economics Workshop

Date and Location

Thursday, February 16, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

The purpose of this study is to measure the sensitivity of trade volumes and trade unit values to agricultural production shocks. We derive a gravity model of trade with two new features. First, the model assumes perfectly inelastic supply, which captures the short-run nature of year-to-year production shocks and has important implications for levels of regression coefficients and how they can be used to measure the elasticity of substitution. Second, the presence of per-unit trade costs implies that, in percentage terms, unit values based on importing country data (including trade costs) should react less to production shocks than unit values based on exporting country data (excluding trade costs). Using bilateral trade flow data for a large sample of countries and agricultural commodities we find empirical support for the predictions of the model, with relatively high substitutability between varieties of crops differentiated by country of origin and quantitatively large per-unit trade costs. Our framework provides a new method for measuring substitution elasticities and per-unit trade costs using international trade data. Furthermore, our results suggest that trade frictions limit the role of international trade as way of coping with production volatility.