Although agricultural commodities are often assumed to have flexible prices, little has been done to estimate exchange rate pass-through. Perfect commodity arbitrage opportunities imply complete pass-through; imperfect opportunities could lead to incomplete pass-through. Analysis of commodity price and exchange rate adjustments for five commodities exported to Japan by the United States reveals that during the 1970s, commodity prices were generally flexible. During the 1980s, when the dollar was rising, price stickiness on the part of exporters/importers contributed to inflexible prices and asymmetric exchange rate response. Specifically, an exchange rate increase was passed through for some commodities but not a decline.
This study draws upon recent theoretical contributions which have introduced uncertainty into trade theory to examine empirically the implications of international price uncertainty for agricultural comparative advantage in a small open economy assuming risk-adverse policy makers. Utilizing a price endogenous, linear programming model developed for Senegal, it is shown that Senegal's comparative advantage in the production of peanuts and comparative disadvantage in the production of cereals is less clearcut when international price risk is considered. The results suggest a trade strategy of less specialization in peanuts and greater self-sufficiency in cereals may be superior to free trade.The traditional theory of comparative advantage demonstrates that ir every country specialized in the production and export of goods in which another country is a relatively lower cost producer, both global welfare and the welfare of each trading country would be maximized.
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