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IRISH CASE STUDY:
Did Irish Agriculture Benefit
from the Economic Growth of the 1990's? This case demonstrates the use of index numbers in assessing the performance of Ireland's agricultural sector from 1990 to 1999. The case provides a practical example of the use of index numbers, building on the material introduced in chapter 2. The table included provides data on the key price indices relevant to Irish agricultural sector from 1990 to 1999. Price changes caused by shifting supply and demand would cause some prices to rise over time, other prices to fall, while yet others to continually fluctuate. In virtually all economies nowadays there is a tendency for prices of goods and services generally to rise over time. This is known as inflation. The Consumer Price Index (CPI) compiled monthly by the Central Statistics Office (CSO) measures the extent of changes in prices relative to a base period, which is set = 100. Movements in prices are examined relative to the base year. The CSO also compiles an index for agricultural output and an index of inputs purchased by the agricultural sector.
If one divides the Agricultural Output Price Index (AOPI) by the CPI a deflated price index or real price index is obtained as shown in the table. If the AOPI is divided by the Agricultural Input Price Index (AIPI) this provides a measure of the farmers, terms of trade, describing how prices received by farmers for their output are moving in relation to the prices they must pay for factor inputs. These include land, labour, capital and intermediate goods and services such as animal feed and fertiliser. The data in the table show that between 1990 and 1995 the prices farmers received for their output, as measured by the AOPI, increased by 8.2%; input prices rose by 2.8%; whereas prices generally, as measured by the CPI, rose by 13.2%. The increase in output prices may suggest that farmers fared well over this period, but of course this statistic on its own tells us very little. Comparing the movement in output prices with changes in other prices provides a more meaningful picture of trends. During this period farmers got higher output prices than the prices they paid for their agricultural inputs, as reflected by the terms of trade index, but general inflation as measured by the CPI was consistently higher with the result that farmers lost rather than gained in these relative price movements. While prices, as measured by the CPI, increased 21.6% in the 1990's and agricultural input prices rose by 3.5%, the prices farmers received for their output dropped by 9% resulting in a 12% reduction in farmers terms of trade over the decade. Farmer's terms of trade declined rapidly during 1996 and 1997, improving marginally in 1998 before declining again (by 5%) in 1999. Livestock prices have been largely depressed since 1995. Agricultural input prices did not rise in line with general prices as depressed output prices led to a reduction in gross agricultural output resulting in reduced demand for feed and fertiliser.
Source: Derived from data in the Irish Statistical Bulletin, Central Statistics Office, Dublin.
When the real price index is used to assess agricultural prices, farmers are found to have suffered a decline of 25.1% in relative prices over the decade. When this is coupled with the fact that average farm income in 1999 was £9,293 compared with the average industrial wage of £16,158, the experience of Irish farmers in the 1990's was thus an unhappy one.
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