Chapter 4


3.3.4 Impact on factor and household income

Income means purchasing power and, in conjunction with the price level, determines the
ability of a household to express its food needs as effective demand (see par. 3 of Annex 1).
In order to assess the impact of an exchange rate devaluation on income and food demand,
we have to distinguish the following three aspects:
1) impact on profits from the production and sale of products to the market;
2) impact on factor employment and wage levels;
3) impact on real income.
These aspects are discussed in detail in the following sections.

1) Impact on profits

 In line with the induced price changes, .a devaluation affects the profits from the
 production and sale of products to the market.

 As most agricultural products belong to the group of tradables or tradable substitutes, it
 can be expected that, on average, agricultural incomes will raise. Within the agricultural
 sector, there will, however, be a large variation. Table 4.6 shows an approximate ranking
 of the price and income effects of different types of agricultural commodities.

 Producers of cash crops for exports are likely to enjoy the largest income rise, while the
 incomes of food producers will, on the average, increase more moderately. Producers of
 those food commodities which are non-tradable and non-substitutes of imports may suffer
 an income decline.

 Table 4.6 gives a very rough pattern of the likely impact of an exchange rate devaluation
 on agricultural income from the sale of different types of commodities.

 In order to arrive at valid results, the consumption patterns/structure of food demand in a
 particular country/area as well as the varying production costs need to be taken into
 account. The latter, too, are directly and indirectly affected by a devaluation; directly
 through increased prices for imported inputs, indirectly through possible changes in
 wages for agricultural labour (see below). On the other hand, a decline in export prices
 caused by collective adjustment, already referred to above, may reduce the initial strong
 income effect for export crop producers.


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