1

Introduce the main context of the agricultural regulation of the European Union; the
institutions and instruments; the relevance of the agro-business
1. The main context of European Union regulation on Agriculture (CAP)
1.1. Establishment of the CAP (Original CAP)
CAP was introduced because of lack of food production in Europe after WWII. This was due to:
- Unreliable prices Undercut from abroad if there were low yields.
- Low investment Not worth modernizing farms, as they couldnt be sure of a good price.
- Wasted land Poor quality land with lots of small fields.
The CAP was initiated after World War II as part of the Treaty of Rome that was signed in 1958.
Following post-war shortages, Europe began to explore ways to become self-sufficient in food and
agricultural production at the regional level. The Treaty of Rome set the stage for the CAP by
establishing guaranteed markets as well as a fair price for agricultural producers.
The CAP went into effect in 1963 with four basic principles:
A unified market for the free movement of agricultural products in the European Union covered
by community preference.
Financial solidarity: All costs of the CAP were to be financed out of a communal treasury,
FEOGA (European Fund for Orientation and Agriculture Guarantee), supported by import tariffs
and contributions from European countries.
Community preference: European products were to be given preference over imported products
Parity and productivity: Farmers incomes were to be equal to incomes in the other sectors, with
reasonable prices in order to permit food access to the consumer.
1.2. Objectives of CAP (set out in article 39 of the Treaty of Rome):
* To increase agricultural productivity by promoting technical progress and by ensuring the
rational development of agricultural production and the optimum utilization of the factors of
production, in particular labour
* To ensure a fair standard of living for the agricultural community, in particular by increasing the
individual earnings of people engaged in agriculture
* To stabilize markets
* To assure the availability of supplies
* To ensure that supplies reach consumers at reasonable price
1.3. Problem of CAP
The CAP was very successful in meeting its objective of moving the EU towards self-
sufficiency from the 1980s onwards. During the 1960s and 1970s, the CAP led to increased agri-
cultural production in Europe and was generally considered a positive vision for growth in the
post-war region. However, the CAP created a lot of problems.
-The increasing cost of CAP: The policys financial cost has been very substantial. In the 1970s
and 1980s, the CAP absorbed about two-thirds of the ECs entire annual budget on average.
European taxpayers have paid higher taxes than would have been the case in the absence of farm
support, while the setting of target and intervention prices substantially above the prices prevailing
on world markets raised the cost of food for European consumers. Estimates of the CAPs total
expense vary widely due to differences in the methods employed and movements in world
commodity prices.
- Surplus production: The key problem was that stabilizing agricultural prices at high levels
encouraged Europes farmers to increase output. Importantly, this met a number of the CAPs
original objectives, but by the early 1980s as domestic production consistently ran ahead of
domestic consumption the EC was compelled to purchase and store large amounts of surplus
2

commodities, producing so-called "butter mountains" and "wine lakes" which often had to be
resold at a loss on world markets; or else the EC had to entice traders to sell overseas by paying
them export "refunds" (export subsidies) equal to the difference between the Community
intervention prices and the lower world prices. Moreover, the linking or "coupling" of support to
the farmers current volume of production ensured that, inequitably, the largest producers received
most of the benefits (in 1991 a European Commission document said that eighty percent of CAP
assistance went to just twenty percent of farmers).
- Income problem:
*In 1990 average income per farm worker < 40% income per worker in the EU.
*Very unequal distribution of gains
*In the short run price support keeps smallest farms in business, but most of the income
goes to largest, richest farmers
35% get 78% benefits (mid 1980s)
20% get 80% benefits (1992)
- Damage environment: farmers increase output through intensive practices such as:
intensification (more fertilizers and pesticides), specialisation (crops and animals separate),
marginalisation (areas where land poor left out), and abandonment. Especially there is the impact
on water quality, etc.
1.4. Current CAP:
The CAP is an EU policy created to protect agriculture throughout the EU by controlling prices,
levels of production and issuing subsidies to protect the rural/agricultural community. Recent
reform has also split CAP into two separated pillars Pillar 1 and Pillar 2; the separation of the
CAP into these two different pillars is not based on the policies that each pillar funds but is more
importantly based on the different budgets and different rules that are used to fund each pillar. The
CAP is funded from the EU budget and accounts for roughly 40% of total EU budgetary
expenditure. The EUs aim is gradually to move all support into the second pillar, in order to make
the CAP seem more environmentally friendly and to bring it more in line with WTO
commitments. However, there still remains disagreement as to the speed and the scope of that
course of action.
- Pillar 1 (product/producer support): Includes both direct payments to farmers and market
management measures. Pillar 1 expenditures are predetermined and fully funded by the EU; the
Paying Agencies are reimbursed by the EU on an annual basis. Pillar 1 measures are set centrally
and apply across the EU as a whole. In 2002, the Brussels Ceiling put a limit that spending on
Pillar 1 (but not Pillar 2) should not rise more than 1% in cash terms until the end of the next
Financial Perspective effectively freezing Pillar 1 expenditure until 2013.
- Pillar 2 (Rural development policy): Focused on improving the structural and environmental
performance of agriculture by promoting local/rural development. It is co-financed by the Member
States as well as from the EU Budget. Pillar 2 expenditure is programmed at the Member
State/regional level and involves multi-annual commitments to beneficiaries (farmers) based on
the programmes in place.
1.5. CAP reforms over time:
i) Late 1980s
Reforms to address the incentives to over-production created by the CAP:
Introduction of Maximum Guaranteed Quantities (MGQ) for most products. If production in a
given year is above the MGQ, then the intervention price is to be cut by 3% the following year.
3

Introduction of national production quotas in milk (1984). In the case of oil-seeds markets,
intervention to buy up excess output will only take place outside the harvest period, to create
incentives for the farmers to sell produce in the market.
1988: limit to the CAP budget. Set at 27.5 billion ECU
ii) Reform of 1992 (MacSharry proposal)
This aimed to control further agricultural output and to improve competitiveness in the sector by
lowering support prices. These reforms focused on major crops (cereals, oilseeds and beef). The
principal measures were:
The intervention price was cut by 30% for cereals and 15% for beef.
Farmers were compensated for the price cuts as long as farmers continue to produce with
direct payments based on historical yields and animal numbers.
In order to reduce output, direct payments were linked to a mandatory 10% land set aside for
farmers. These payments were coupled to production through a requirement to produce on land
not set aside.
iii) Agenda 2000
This reform was largely prompted by the need to prepare the EU for enlargement to 25 countries
and to address WTO commitments under the Uruguay Round agreement future surpluses could
not have been disposed with on world markets. The Commissions aim was to replace price
support mechanisms with direct payments linked to other measures to make the CAP more of a
complete rural policy. It also allowed governments of member states to transfer funding away
from farmers and into rural development. Further gradual reductions of price support were agreed
(20% on guaranteed prices for beef and 15% for cereals). In order to compensate farmers, a
reduction in intervention prices for several products was accompanied with compensatory direct
payments.
iv) Reform of 2003 (Fischler reforms)
Move to merge the product-specific direct payments for various commodities into a single farm
payment (SFP), which will ultimately be fully decoupled from production decisions. Policy
measures can be considered decoupled if they do not affect relative prices of agricultural
commodities or the inputs used to produce them. Rather than being based on levels of
production, the SFP is calculated on the area of land or the numbers of cattle that the farmer
held in a previously defined period.
The introduction of decoupled direct payments is expected to reduce distortions in production
decisions and thus improve efficiency. However, member states still can opt to retain part of
the coupled payments for some commodities (eg equal to 25% of the area for arable crops).
Set-aside restrictions have been given the additional objective of reinforcing environmental
benefits. In order to qualify for the payment, farmers would also have to meet with
environmental, animal welfare and food quality standards. These are known as cross-
compliance standards.
However, despite the reforms, intervention prices for major commodities still remain an
important element of the CAP. Moreover, the 2003 reform did not address market access
issues as the EU still maintains high tariffs. Export subsidies are still available for surplus
production within WTO limits, though lower intervention prices will reduce the size of the
subsidies (USDA, 2004).
A reduction in direct payments (modulation) for bigger farms to finance the new rural
development policy.
4

Budgetary discipline imposed on market support and direct payments: 42.8 billion in 2004 and
reaching 48.6 billion in 2013.
v) Reform of 2008 (CAP Health Check)
The agreement abolished the set-aside programme increased milk quotas gradually until the
abolition in 2015, further transferred production-linked direct aid payments to the Single Payment
Scheme, extended SAPS until 2013, simplified the cross-compliance policy, and stated that
all farmers receiving more than 5,000 in direct aid have their payments reduced by 5 percent
and the money is transferred into the Rural Development budget. This rate will be increased to 10
percent by 2012. An additional cut of 4 percent will be made on payments above 300,000 a year
(known as modulation). In addition, these 2008 reforms maintained assistance to sectors with
special problems under Article 68measures.
2. The institutions of CAP
Agricultural decision-making in EU has the distribution of powers between EU institutions:
originally Commission proposes, Council disposes, Parliament advises, and Court rules.
2.1. Agricultural Council of European Union: Monthly obligations for MS (Member State)
agricultural ministers
- Marathon meetings: more days, weeks, over the night; about the policy setting (institutional
prices, CAP reforms);clubbing atmosphere including for many political, mental and interest
relationship; independent decision (not controlled by other members of government); the power of
large CAP budget; important role of the Presidency (different efficiency of responsible ministers).
- The council was for years driven by French- German partnership.
+ Conservatism and protectionism as the main ideology
+Many ministers took the Council as the means how to support their farmers: to come back from
the meeting with the full bag of money
+Changes in last year (new concerns, reformists with stronger voice)
-Instead of COREPER (Committee of Permanent Representatives) Special Committee for
Agriculture (SCA)
+ For preparation of Council meetings (only in agriculture - complexity),
+ Monthly meetings (more intensive in the reform process)
+ The agrarian diplomacy.
2.2. European Commission for Agriculture
- Agricultural Commissioners
+ Important impact on the decision content and process, especially by historical persons
(Mansholt, MacSharry, Fischler).
+ Principally come from small Member States.
+ Farm Lobbyists: Lobbyists for CAP preservation as well as for reforms. Search for common
positions.
+ Standing tensions with other policy areas (DGs), like trade, budget, cohesion policy
- Directorate-General for Agriculture (DG Agri, before DG VI)
+Second largest DG
+Director-General comes mainly from larger MS (France, Spain).
+ French is informal working language, therefore Director-General usually some people from
Roman MS.
+Permanent human resources policy.
+ Strong analytical and strategic work (strategies, analysis, reform concepts).
- Comitology agriculture
5

+Intensive Committees work in Agriculture
- 46 agricultural committees, 492 meeting per year MC and RC (1999),
- mainly Management Committees (MC), the responsible civil servants from MSs
- MC for each Common Market organization
- Important decisions (e.g. the level of export subsidies, the National Rural Development
programmes)
- Opinions (1999): 2173 approvals, 121 none, 2 refusals
+ Frequency of some MC and RC meetings (1998):
- Once per week: cereals, sugar
- Once per two weeks: milk, beef, pork, fruits and vegetables, fats, fodder, veterinary,
phytosanitary issues
- Once per month: poultry, wine, sheep and goat meat, processed fruits and vegetables,
bananas, rural development, EAGGF
- Once per two months: tobacco, hops, forestry, organic agriculture
- Once per 3-6 months: alcohol, FADN, research
- Once per year: dried fodder, planting materials, genetically resources
2.3. European Parliament: Greater EP powers of co-decision, but still only consultative powers
on CAP expenditure.
2.4. European Court of Justice (ECJ): In agriculture the ECJ has played important role in the
establishment of single market and competitiveness law.
2.5. European Court of Auditors: Its "mission is to audit independently the collection and
spending of EU funds and, assess the way that the European institutions discharge these functions.
The auditors are often critical of the CAP in their reports.
2.6. CAP decision making process








The
Commission
European
parliament
Council
Proposal
Working
groups
Coreper I,
SCA
Council for
Agriculture
and Fisheries
CAP (1st pillar),
STRUCTURAL
MEASURES
FOOD SAFETY,
VETERINARY
PHYTOSANITARY
LEGISLATION
EES
C
CoR
Adoption of a
decision
Implementation:
Adoption of
implementing acts
Advisory
Regulatory
Management
Co-decision
Cons.
Comitology
committees
Comitology
Consultation p.
6


3. The instruments of CAP
The CAP's main instruments include agricultural price supports, direct payments to farmers,
supply controls, and border measures.
-Domestic price support: Domestic price supports were the historical backbone of CAP farm
support, but have been largely replaced in this decade by direct payments, which now account for
around 70 percent of the CAP budget. Prices for major commodities such as some grains (barley,
bread wheat, and corn), dairy products, beef and veal, and sugar still depend on the intervention
price as a guaranteed floor price, but at much lower levels than before the reforms. If world prices
are high, then intervention in the market is not needed.
Other mechanisms, such as subsidies to assist with surplus storage and consumer subsidies paid to
encourage domestic consumption of products like butter and skimmed milk powder, also support
domestic prices. The 2003 reforms, however, cut storage subsidies by 50 percent. Some fruits and
vegetables are withdrawn from the market in limited quantities by authorized producer
organizations when market prices fall to specified levels. Reforms have lowered the cost of the
CAP to consumers, as intervention prices have been reduced. However, taxpayers now bear a
larger share of the cost because more support is provided through direct payments.
-Direct payments: While price support remains a means of maintaining farm income, payments
made directly to producers provide substantially more income support. The payments specified in
the 2003 reform are made to farmers based on the average level of payments made during 2000-
02, and no production is required. In the livestock sector, headage payments (payments per
animal) are made in the beef and sheep sectors based on 2000-02 average payments, with no
production required. Other special payments are made, but they are relatively minor in value.
-Supply control: The 1992 reforms instituted a system of supply controlthrough a mandatory,
paid set-aside program to limit productionthat was maintained until the reforms of 2008 when
set-aside was abolished. To be eligible for compensation payments in the 1992 reform, producers
of grains, oilseeds, or protein crops had to remove a specified percentage of their area from
production. Agenda 2000 set the base rate for the required set-aside for arable crops at 10 percent.
Producers with an area planted with these crops sufficient to produce no more than 92 metric tons
of grain are classified as small producers and were exempt from the set-aside requirement. While
set-aside is no longer used, it could be re-established if conditions such as over supply returned.
Supply-control quotas have been in effect for the dairy and sugar sectors for two decades.
-Border measures: The CAP maintains domestic agricultural prices above world prices for many
commodities. In preferential trade agreements, such as those with former colonies and neighboring
countries, the EU satisfies domestic consumer demand while protecting high domestic prices
through import quotas and minimum import price requirements. The CAP also applies tariffs at
EU borders so that imports cannot be sold domestically below the internal market prices
(intervention prices) set by the CAP.
Another important feature of the 2003 reforms is a decoupled income support policy consisting
of single farm payments based on the average historical payments for the 1999-2001 period. EU
farmers now have more choices in their planting decisions because of the decoupled payments.
Commodity support prices continue to exist, but at lower levels, while direct payments to farmers
without requirements to plant a crop are more widespread.
4. The relevance of the agro-business
Basically, CAP affect to agribusiness indirectly through the payment for crops and land
through price support mechanisms call price market control. These tools implied to protect
7

European farmer from cheaper products outside of EU aiming to (i) stabilize markets; (ii) provide
certainty of food supplies; and (iii) ensure that those supplies reached consumers at reasonable
prices. In order to achieve these above objectives, two mechanisms were adopted including target
price establishment for farm product and price floor for agriculture commodities. Mainly the
farm products affected by CAP were wheat, coarse grain, rice, ruminant meat, non-ruminant meat
and dairy. Different researchers had estimated the change of agro-products due to the effect of
CAP from 0.7% to 25% of world price. Because of the adoption of price control, agro-product
being under CAP included sugar, bananas, rice, horticulture, cotton, beef, cocoa, coffee, tea and
palm oil, have benefited from trade preferences. Some are impacted by the external effects of the
deployment of EU policy tools, but all mainly are affected by the CAP.
Regarding to the first mechanism, the so called target price-a price at which it is hoped
farmers will be able to obtain on the open market - aimed to treat to the imported foodstuff from
other countries to European countries. Following this mechanism, the imported foodstuff had to
pay the tariffs which targets are to increase budget for domestic agriculture production and to
prevent the undercut price. This issue has pushed the food price up highly due to the high tariff.
Reasonably, the level of food consumption has been reduced. It is estimated that, the average
households in Eucoutries spends 15% of budget on food compared to 30% in 1960s. This issue,
furthermore, affected to domestic support, export subsidies and market restriction of farm
production. Regarding to the domestic support, it can be seen that, target price seem to be failed in
terms of price support and subsidies paid to farmer. The expectation of getting surplus production
through target price mechanism was consequent by the drop of farm products world price leading
to the low profit from foodstuff consumption. Consequently, domestic farm product was
redundant. Turning to the export subsidies, the undeliberated support of CAP theoretically pressed
the price of EU agricultural production down. EU subsidies on agricultural products affected
negatively on local farmer by the low profitable and prevented the export of EU as well.
According to Evaluation of Agricultural Policy Reforms in the European Union in 2006, the
amount of exported wheat, coarse, grains, oilseeds, rice, milk and beef reduced from 60 million
tons in 1989 to 5 million tons in 2006.
Turning to the mechanism of intervention price which was set lower than target price about
10-20%, following this meaning, the national intervention agencies could buy all products at that
price which preventing the fall sharply of price and removing supply. Reasonably, this mechanism
set up the price floor for agriculture commodity. Market supply measures should not slow
farmers' ability to respond to market signals. Intervention will be abolished for pig meat and set at
zero for barley and sorghum. For wheat, intervention purchases will be possible during the
intervention period at the price of 101.31/ton up to 3 million tons. Beyond that, it will be done by
tender. For butter and skimmed milk powder, limits will be 30,000 tons and 109,000 tons
respectively, beyond which intervention will be by tender. Under the articles of CAP, the
quantities of cereals, beef and veal, and butter and skim powder were fixed or very low prices.
However, in the period of 2009 to 2010, cereals were not intervened anymore leading to
encourage the private storage.
CAP not only affects to price of agriculture but also quantity of commodity caused by the
large increase in European countries imports. The reason of this was caused by the lower
consumer and higher producer prices. Various data has evidenced that the total volume traded was
fluctuated sharpedly in terms of net import to EC and other developing countries from 1 million
tons to 68 million tons of wheat, rice, sugar and dairy. The reason of this, firstly, CAP has an
essential saddening impact to the world price of agro-product. Secondly, the flow of trade is
8

deformed. In practice, European countries export artificially goods at the expense to other
countries. Furthermore, the distortion push the volume of world trade lower than it could be. This
issue is so important to farm product that protected heavily in the community such as wheat,
grains and ruminants.

Agriculture
Agriculture refers to the art and science of crop and livestock production. Agricultural
practices such as ploughing, planting, weeding, irrigation, crop rotation pesticides were developed
long ago, but there have been major strides in the past century towards commercialization and
technology use. The history of agriculture has played a major role in human existence, as
agricultural progress has been a crucial factor in world economy.
Agricultural system is the interactions - among the components of agricultural systems, among
hierarchical levels of agricultural systems, between agricultural and other land use systems, and between
agricultural systems and their natural and social environments. In particular, its aim is to the integration of
knowledge among those disciplines that support agriculture. Many fields contribute and therefore be
multi- or inter-disciplinary. Generally focus on either methodological approaches to understanding and
managing interactions within or among agricultural systems, or the application of holistic or quantitative
systems approaches to a range of problems within agricultural systems and their interactions with other
systems. Because of the nature of the readership of Agricultural Systems, the contents of papers should
be easily accessible (properly introduced, presented and discussed) to readers from a wide range of
disciplines.
History of input-output economics
Although the earliest creation of the theory can be traced back to Franois Quesnay (1694-1774),
input-output economics was founded and popularized by the 1973 Nobel Laureate in economics,
Wassily Leontief (1905-1999). Leontief was originally from Russia, and resided in the United
States. In 1932, at Harvard University he developed the first economic input-output table,
containing 500 U.S. economic sectors (Leontief,1951). Inspired by his work, a group of
economists and professionals has continued to work on input-output analysis, developing it to be a
powerful technique for quantitative economic study.
After Leontief constructed the first input-output table for the U.S. in the early twentieth century,
governments of major industrialized countries, including the U.S., Japan, and some European
countries, began to develop national input-output tables. At this point, most of economically important
countries, including both industrialized and developing ones, have developed and used input-output
tables for years. For instance, the Organisation for Economic Co-operation and Development (OECD)
has input-output tables harmonized from various sources for its member countries and other major
countries such as China and Russia (Yamano and Ahmad, 2006).
General terms of input output model
Generally, input-output analysis divides the economic system into a number of sectors, and considers
the flows of commodities and services in and out of each sector. Because each sector can have flows to
and from any other sector, the amount of information such a model contains increases rapidly as the
number of sectors in the system is increased. It is based on general equilibrium theory of demand and
supply. At the same time it must be pointed out that, there are some differences between them. On
the one hand, general equilibrium approach is purely theoretical and a bit far from todays
economic life. Leontiefs approach is based on the empirical Input-Output tables, but theoretically
it also is not suitable for real economics (Davar, 2000a). In practice, the basic framework of input-
9

output analysis consists of two models, a quantity model and a price model. The quantity model can
use either physical units such as tones of wheat produced in Hungary, or monetary units. In the latter
case, it is easy to confuse the price input-output model and the monetary input-output model. Those
two terms, however, are not the same; the latter one is just one form of quantity input-output model.
The most widely used input-output model is in fact the monetary model because it forms the basis of
national economic accounting systems. Thus, Monetary Input-Output Tables (MIOTs), are available
for most countries today (Hubacek and Giljum, 2003). In the following sections, the general and
computational structures of IOT are introduced

Leontief open input-output model
For simplicity purpose of input-output model, the various elements of net final demand, which include
final consumption agricultural sector expenditures and gross capital formation of individual sub sector, are
considered as a single column vector and elements of value added, which are also referred to in economic
literature as primary inputs, will be considered as a single row vector. It is also assumed that producers do
not engage in any secondary production, i.e., they produce only their characteristic products or, in other
words, one type of producers produces only one type of products. Thus, henceforth, no distinction will be
made between industries and products. The interrelationships between subsectors in an economy with
relation to the production and use of their products and the products imported.
Input-output analysis became an economic tool when Leontief introduced an assumption of fixed-
coefficient linear production functions relating inputs used by an industry along each column to its output
flow, i.e., for one unit of every industry's output, a fixed amount of input of each kind is required. otal input
of the consuming industry.

Industry A Industry B Industry C Net final
demand
Industry A a 11 a12 A13 Y1
Industry B a21 a22 a23 Y2
Industry C a31 a32 A33 Y3
Value
added
V1 V2 V3
a
11
+ a
12+
a
13
3=X
1

a
21
+ a
22+
a
23
=X
2

a
31
+ a
32 +
a
33
=X
3





x

Relationship between input and output can be given by equation
AX+Y=X
X is the vector of output
Y is the vector of net final demand
A is input output coffient matrix


10

Inverse matrix











Assumptions of Open-Input model
Since an input-output model normally encompasses a large number of industries/subsectors, its
framework is quite complicated. To make the problem simple, the following assumptions are :
(1) Each industry produces only one homogeneous commodity
(2) Each industry uses a fixed input ratio (or factor combination) for the production of its output
(3) Production in every industry is subject to constant returns to scale, so that a k-fold change in
every input will result in an exactly k-fold change in the output
Numerical Example























1
( )
variable vector
final demand (constant term) vector
Leontief matrix
If - is nonsingular, we can obtain its inverse and the unique
solution is:
* ( )
I A x d
x
d
I A
I A
x I A d

=
=
=
=
=
11 12 13
21 22 23
31 32 33
0j
0.2 0.3 0.2
0.4 0.1 0.2
0.1 0.3 0.2
Note that each column sum in A is less than 1. If a is the dollar's worth
of the jth commodity, we can write (subtract e
a a a
A a a a
a a a
( (
( (
= =
( (
( (

01 02 03
ach column sum from 1):
0.3 0.3 0.4 a a a = = =
1 1
2 2
3 3
The open input-output system can be expressed in the form
( ) as follows:
0.8 0.3 0.2
0.4 0.9 0.2
0.1 0.3 0.8
I A x d
x d
x d
x d
=
( ( (
( ( (
=
( ( (
( ( (

11










Strengths
The most interesting contribution of input-output matrices concerns impacts on sectoral distribution and
trade. Leakages due to imports by a country may prove to be important for policy-making. Similarly,
knowledge of the impact of sectoral demand may prove to be important, particularly if it is considered that
some sectors must be stimulated to accelerate the growth rate.
Limitations
Leontiefs Input-Output has a uniform measurement, namely money measurement. It
Important to note that todays economics is characterized by the price discrimination for both
factors and commodities. The uniform money measurement of input-output makes both analysis
and forecasting difficult and thus yields some confusion.Price discrimination refers to situation where
identical products are sold at different prices. This kind of scenario is found on oligopolistic and
monopolistic market where there is imperfect information about the market or entry is restricted.






1 1
2 2
3 3
The open input-output system can be expressed in the form
( ) as follows:
0.8 0.3 0.2
0.4 0.9 0.2
0.1 0.3 0.8
I A x d
x d
x d
x d
=
( ( (
( ( (
=
( ( (
( ( (

1 1
1
2 2
3 3
By inverting the 3x3 Leontief matrix, the solution would be:
* 0.66 0.30 0.24
1
* ( ) 0.34 0.62 0.24
0.384
* 0.21 0.27 0.60
10
If the final-demand vector happens to be
x d
x I A d d
x d

( ( (
( ( (
= =
( ( (
( ( (

*
1
* *
2 3
5 , the solution values are:
6
1 9.54
[0.66(10) 0.30(5) 24(6)] 24.84
0.384 0.384
7.94 7.05
20.68 18.36
0.384 0.384
x
x x
(
(
(
(

= + + = =
= = = =
12

Share of Agriculture in the GDP of various countries

Country 2006 2007 2008
Afhagnistan 33 34 29
Azerbarjan 8 7 6
Ethiophia 48 46 44
Hungary 4 4 4
Kenya 27 20 21
vietnam 20 20 22
USA 1 1 1

,
Source:Calculated from world bank data

From the graph, it clearly show that the more developed a country becomes, the share of
agricultural sector in the GDP tend to reduce. The share of Agriculture among developing
countries is very high.
Significance of Input-output system in Agricultural sector.
The economic importance of agricultural system for development is that it allows quantitatively
measurement of effect and the linkage effect is often used in such measure. As agriculture grows,
it stimulates series of economic linkages with the rest of the economy. The resulting demand
linkages fall into two broad categories: production linkages, and consumption linkages.

The system give a clear view of Production linkages and backward linkages; the input demands by
farmers for farm equipment, pumps, fuel, fertilizer and repair service as well as forward linkages from
agriculture to non-farm processors of agricultural raw materials. In prosperous agricultural zones, these
linkages prove substantial as pump suppliers, input dealers, grain traders, processing industries and
transporters emerge to supply agricultural inputs and process and distribute farm output. Empirical work
on these relationships has focused on measurement of input-output coefficients to establish the strength
of the forward and backward supply linkages.

0
5
10
15
20
25
30
35
40
45
50
2006
2007
2008
13

From early experience on increasing initial capital in farm productivity and incomes, production and
consumption linkages together induce second rounds of demand-led growth in all the other sectors of the
economy. Linkages are even higher when consumption of urban-produced products is included. The
influence of other linkages is referred to as multiplier effects which result in increase in capital and
income generation in numerous sectors.

The system also plays an important role in the generation of employment opportunities in various
countries.In many developing countries, agricultural sector employ very small percentage of the
population but farmers are regarded as a very important lobby group by the political class.In the
developing countries agriculture provides employment opportunities to majority of the population.






Reference
LEONTIEF, W.W. (1951), The Structure of American Economy, 1919-1939 (2nd. edition)
(New York, Oxford University Press).
Hubacek, K; Giljum, S (2003) Applying physical input-output analysis to estimate land
appropriation (ecological footprints) of international trade activities, ECOL ECON .

Davar, E. (2000a) Leontief and Walras: Input-Output and Reality, 13th International Conference
on Input-Output Techniques, 21-25 August, Macerata, Italy

Norihiko Yamano & Nadim Ahmad, 2006. The input output database:2006 edition OECD
Publishing

www.worldbank.org