High-value agricultural products such as processed foods are becoming increasingly important for both the production and trade of the United States. Efficiency gains in primary agriculture may be transferred to the processed food sector in the form of cheaper inputs because price declines and productivity growth have been coincidental in agriculture. In turn, efficiency gains in the processed food sector are transferred, in part, back to primary agriculture by increasing the derived demand and, thus, mitigating the decline in the latter's price. Efficiency gains are relatively more important in primary agriculture than in food processing. Policies which encourage productivity growth that lowers the production costs can increase the competitiveness of both sectors. The ultimate beneficiaries of the price declines in primary agriculture and food processing are consumers. Copyright 1996, Oxford University Press.
While it is generally accepted that change in the real value of the dollar is an important determinant of exports, it has not been rigorously demonstrated that this relationship, derivable from theory, holds empirically for agricultural exports and the components of agricultural exports. Starting with a dynamic maximizing framework, this paper estimates the real tradeweighted exchange rate and trade partner income effects on U.S. agricultural exports. For the period 1970-2006, a one percent annual increase in trade partners' income is found to increase total agricultural exports by about 0.75 percent, while a one percent appreciation of the dollar relative to trade partner trade-weighted currencies decreases total agricultural exports by about 0.5 percent. While these effects carry over to 12 commodity subcategories, they are conditioned by differences between bulk and high value commodities, and differences in the export demand from high compared to low income countries. We use a directed acyclic graphs (DAG) technique to identify the inverted fork causal relationships from vector autoregression (VAR) models. We also find that there is an asymmetric exchange rate effect so that the negative effect of exchange rate appreciation on exports sometimes dominates the positive effect of foreign income growth.
This paper focuses on estimating the effects of the real FDI-weighted exchange rate on real U.S. foreign direct investment (FDI) in the global processed food industry. We use a straightforward production possibility framework as our theoretical basis to demonstrate the shift of production between countries on the basis of exchange rate fluctuations. The log-log regression model, derived from the theoretical model, gives statistically robust results to show that for the years 1983 to 2002, the exchange rate fluctuations, the level of fixed capital in the U.S. food industry, and the cost of materials in both the United States and abroad were major determinants of the stock of U.S. FDI in the global processed food industry. As the dollar appreciated, U.S. FDI increased. An overall conclusion is that countries with an undervalued exchange rate will experience increased FDI. Countries with overvalued exchange rates incur costs from lost export opportunities for domestic firms as well as discourage FDI.
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