An improvement of the supply analysis of the farming industry: The value added approach

It is a very well-known fact that there is a tremendous differentiation process going on in the production of food and fiber. Our first topic is that the consequences for the supply analysis of the farming industry, however, are not noted. This of course can lead to serious errors in the estimation of supply elasticities of farming industry. It is very well-known that the contribution of a sector to the national income is the net value added. Thus the economic product that originated in this sector is the quantity component of net value added, which can be called net product. The prices which determine the production of this sector are the price component of net value added and the prices of the factors of production in agriculture. What the relationship is between production and prices is the second topic of our paper. The estimation is the third topic in which we propose rather simple solutions for some problems. These problems, as e.g. tautological specification, were also present in the traditional analysis, but were not treated properly. The results of the traditional method are very different from those of our new approach.