Salale University

College of Business and Economics

Department of Economics
Agricultural Economics-I power point presentation
By: Haile G.

March ,2019
Fitche
 CHAPTER ONE
DEFINITION, SCOPE, AND ROLE OF AGRICULTURE IN ECONOMIC
DEVELOPMENT
Introduction: Definition and Scope of Agricultural Economics
Basic concepts
 The term "agriculture” comes from two Greek words, “agros” = field and
“cultura” = cultivation.
 According to that, agriculture is a sort of economic activity connected with land,

soil and cultivation.

 CONT’D
 All the definitions that follow the word “agriculture” should not be considered as a
mere production of crops or farming.
 In addition to this, now a day, agricultural activity includes animal husbandry and
forestry.
 Specifically, the agriculture sector has the following main areas: Crops
production, Fruits production (Pomiculture), Forestry (Silviculture),
Livestock, Poultry farming, Beekeeping (Apiculture) and Fisheries
(Aquaculture)
 Again it goes beyond on businesses on farm and includes such business activities
as marketing, processing and distribution of agricultural products and other
off-farm activities like supply of inputs (seeds, fertilizers, credits, etc.).
 CONT’D

What is economics?
 The modern definition of Economics, like other science, is brought evolutionary
from the earlier definition of Adam Smith “economics as the study of wealth” to
the modern Keynesian definition “as the study of administration of scarce
resources and of the determinants of income and employment.”
 you had been acquainted to different ways of defining economics.
 This means there is no single definition for the word economics.
 But for our purpose let us define economics as a science of analyzing the use of
limited resources to achieve the desired wants/satisfy human wants.
 CONT’D
What Agricultural Economics is about?
 Agricultural Economics is an applied science dealing with how humans
choose to use scarce productive resources and technical knowledge to
produce agricultural output and to distribute these for consumption to
various members of society over time.
Q1: Is agriculture unique from other sectors? If you think so, in what
aspects?
Discuss in group(5 minutes)
 Agricultural production has several general characteristics that distinguish it
from other forms of production.
 These are:
1) The existence of many small production units (despite differences among
countries, agriculture employs by far the largest share of the world
population)
2) The plurality of products from one producing unit (individual producing unit
or farm typically engage in production of several different types of
commodities)
3) The biological nature of the production process (production processes are
geared to the life cycle of the particular plant or animal that is involved
requiring considerable quantities of heat, moisture, and soil nutrients)
4) The nature of location decision (decision is how best to use the land)
5. The existence of considerable degree of production for self-sufficiency
(majority of farmers in the world plan their activities in terms of production for
home consumption rather than for the market. In other words it does not enter
commercial channels)
6. Its sensitivity to natural forces such as rainfall intensity, climate, drought,
temperature and the like.
 Because agriculture is special (almost unique) in a number of ways, a
specialized branch of economics called Agricultural Economics has developed to
address the problems associated with it. And agricultural economists make
extensive use of microeconomics or price theory in which propositions on the
functioning of markets in terms of production, consumption, and exchange are
developed from hypothesis about the behaviors of individual producers and
consumers.
 In contrast, macroeconomics utilizes highly aggregated concepts such as total
consumption, national output, investment etc. which are closely linked with
agriculture.
 Recently some studies (e.g. Trimmer et al, 1985) have noted that macroeconomic
policies and adjustments can have a major impact on the agricultural sector.
 CONT’D
 The central theme in studying agricultural economics is that resources - land,
labor, capital, time, etc. are limited or too few to satisfy all human wants and
that as a consequence of this scarcity, choice must be made.
 The problems with which we will study are ones of "constrained choice"
(socio-economic influences-land tenure, farm size, market system,
infrastructure, government actions, cultural influence); that is how
limited quantities of inputs are allocated between alternative production
uses of agricultural as well as non-agricultural activities, and of how
limited income are allocated between the many products consumers may
buy.
 EVOLUTION OF THE SUBJECT MATTER
The application of economic theory to agricultural problems has gone
through a process of slow acceptance.
The origin of the field, now known as Agricultural Economics reach back

in many directions and over a long period of time.

The field came from two separate sources: - from the physical sciences,

and later, from economic theorists.

Since agriculture and its production systems are influenced by physical

(topography, climate), social (tradition, culture) and economic (market,

infrastructure) factors, a comprehensive body of science, which includes
physical science, social science, and economic theory, is fundamental.
 CONT’D
The severity and length of the agricultural depression beginning in the 1880s in
Britain caused increasing attention to be devoted to its causes and possible
solutions.
Primarily agronomists(scientists of soil mgt & crop production) and
horticulturalists(scientists of flower, fruit & vegetable production) made the most
notable early efforts.
They recognized that the ability to grow plants and animals was not sufficient to

make farmers succeed.

Agricultural Economics is an important subject area because it is concerned with

society's basic needs.

Getting food and other agricultural products to all people in the world in the right form

at the right time is an extremely complex process.

 Role of Agriculture in Economic Development
 The contribution of agriculture to economic development is crucial.
 The contributions lie in:
1) Providing food to the rapidly expanding population
2) Increasing the demand for industrial products and thus necessitating the
expansion of the secondary and tertiary sectors, i.e. Market Contribution.
3) Providing additional foreign exchange earnings for the import of capital goods
for development through increased agriculture exports, i.e. Product
Contribution
4) Increasing rural incomes to be mobilized by the state
5) Providing productive employment, i.e. Factor Contribution
6) Improving the welfare of the rural people
According to Kuznet (1960), the contribution of the agricultural sector to economic
development constitutes three elements:
A) Product contribution
B) Market contribution
C) Factor contribution
 A) The product contribution:
 developing countries mostly specialize in the production of a few agricultural
goods for exports.
 As output and productivity of exportable goods expand, their exports increased
and result in large export earnings.
 Thus agricultural surplus leads to capital formation when capital goods are
imported with foreign exchange.
 Foreign exchange earnings can be used to build the efficiency of other
industries and help the establishment of new industries by importing scarce
raw materials, machines, capital equipment and technical know-how.
 This is what is called the product contribution of agriculture, which first
augments the growth of net output of the economy, and then the growth of per
capita output.
B) The market contribution:
 a rise in rural purchasing power, as a result of the increased agricultural
surplus has a great stimulus to increased development.
 The market for manufactured goods is very small in developing countries where
peasants, farm laborers and their families are too poor to buy factory goods.
 Increased rural purchasing power caused by expansion of agricultural
output and productivity will tend to raise the demand for manufactured
goods and extend the size of the market.
 This will lead to the expansion of the industrial sector.

 Moreover, the demand for such inputs as fertilizers, better tools, implements,
tractors, irrigation facilities in the agricultural sectors will lead to the
expansion of the industrial sector.
 Besides, transport and communications will expand.
 The long-run effect of these expansions will be higher profits, which tend to increase the rate
of capital formation through their investment.
C) The factor contribution:
 developing country needs large amount of capital to finance the creation and expansion of
the infrastructure and for the development of basic and heavy industries.
 In the early stages of development, increasing the marketable surplus from the rural sector
without reducing the consumption levels of farm population can provide capital.
 Labor as the principal input can be a source of capital formation when it is reduced on
the farm and employed in other productive works.
 In general, the agriculture sector occupies a central place in the national
economy.
 The manner in which it contributes to the economic development can be depicted
in the chart below:
Agriculture

National Trade Foreign

Food income A way of
exchange
Rural life
Industry development Vocation
Employment
 Interdependence of agriculture and industry
 The interdependence of agriculture and industry helps the development of both
sectors.
 The most important aspect of this interdependence is that the products of one
serve as important inputs for the other.
 Growth of one sector thus means ample supply of inputs for the other.

 The situation is such that a greater flow of products from one sector to other
simultaneously ensures a greater return flow of inputs itself, though with
some time lag.
 Help others to help you in brief, sums up, development.
 Limits of Interdependence:
 The account of the contribution of each sector to the other should not lead one to
conclude that this interdependence is competing.
 Each sector uses some inputs which are not supplied by the other sector.

 For instance, industrial sector does not depend upon the agricultural sector for
supply of minerals and salts as raw materials. Much of its capital is now supplied
from its own sources. It itself supplies machinery to it.
 Similarly, agricultural sector will continue to depend upon nature for certain inputs
like water supply even after industrial sector has provided it with canals and
modern irrigation facilities. As use of machinery is limited in agriculture, human and
animal power will continue to be important inputs for the sector. For these inputs, the
agricultural sector will again depend upon itself.
 Development of agricultural sector will not remove all the hindrances inhibiting the
development of the industrial sector & vice versa we have to consider other factors
too.
 Contributions of Agriculture to Industries:
1. Supply of raw materials to industries: Many industries look to the agricultural sector for
supply of raw material.
2. Agriculture and foreign trade:
 This is one of agriculture’s most important roles in developing countries.
 It is evident that, the majority of the developing countries are largely dependent on primary
exports as their major source of foreign exchange.
 In other words, the import capacity of the typical developing country is based, to a large extent,
on the flow of agricultural exports that it can sell to the rest of the world.
 Since the balance of payments is generally the binding constraint to further growth, especially to
build the efficiency of the existing industries and to help the establishment of new industries,
the role of the agricultural sector as a provider of foreign exchange through exports or as a
saver of foreign exchange through import substitution (particularly through increased
domestic production of foodstuffs) is a crucial one.
3. Provision of market for the industrial sector:
 The increasing income of the farm sector leads to an expanded demand for the
consumer’s goods produced in the industrial sector.
4. Provision of capital and labor to the non-agricultural sector:
 Since it is the agriculture which is the custodian of capital and labor in the initial
stages of economic development, it can be positively asserted that, these factors
have moved to the industrial sector, mainly from the agricultural sector, in initial
stages of economic development in most of the countries.
 The contribution of the agriculturists in setting up of various industries in England,
of textile industry in India and of some important industries in Japan is quite
known.
 The statement about Indian labor that it was migratory in character and that this was
because of its nexus with agriculture shows that it was agricultural sector which
provided labor to the industrial sector in the initial stages of the development of the
latter.
 Contributions of the Industrial Sector to the Agricultural Sector:
1. Provision of modern inputs to the agricultural sector:
 The inputs are in the form of fertilizers, pesticides, machinery etc.

2. Reduction of population pressure on land:

 Data regarding transfer of population from agricultural to non-agricultural sector in India does
not yield an encouraging picture. Dependence of population on agriculture during the last 50
years or so has not declined to any significant extent.
  Growing population and a slow progress of the industrial sector are responsible for this static
situation. However, the population data concerning some developed countries of Europe & that
of the U.S.A. are quite illuminating in this regard.
3. Provision of infrastructure:
 No doubt, many of the items included infrastructure serve the agricultural sector as well as the
industrial sector but these are provided mainly by the industrial sector.
 Transport, electricity, financial institutions, health services, educational and research
institutions, all owe their existence mainly to the facilities provided by the industrial sector.
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