Pakistan Institute of Development Economics

PDR

THE PAKISTAN DEVELOPMENT REVIEW 

The Inflationary Implications of Crop Failure

In discussions of the economic problems of underdeveloped countries, the thinking of layman and of professional economists often diverges widely. Nowhere is this disagreement more patent than in the case of food production and its effects upon the price level. In government agencies, newspapers, and public discussions, the view that bad crops “cause” inflation is ubiquitous, while economists are usually quick to point out the difference between movements in relative prices and the general price level. The economists’ view is sophisticated and requires elaboration. For nearly a century, there has been a division of economic problems into two basic categories:’ those concerned with the value and production of particular commodities relative to other commodities; and those concerned with the total production of an economy and the general price level of the output. There is now an extensive theory of the effect of a decline in the output of a commodity (e.g., food) upon its price. Under most conditions, one can safely predict that an autonomous1 reduction in the output of food will induce a rise in the price of food relative to other prices. But there is no reason to expect a rise in the general price level; for that is determined by another theory a theory which does not concern itself with production of particular commodities, but rather with total production in the economy. If food output were a small part of this total production, the economist would say that the overall price level is not affected by a decline in food output; the rise in food prices, even if large, would be offset by slight declines in other prices2 so that the general price level would remain stable. Food production in Pakistan is, however, no small part of total output.

Richard C. Porter

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