The Inflationary Implications of Crop Failure

Abstract

In discussions of the economic problems of underdeveloped
countries, the thinking of layman and of professional economists often
diverges widely. Nowhere is this disagreement more patent than in the
case of food production and its effects upon the price level. In
government agencies, newspapers, and public discussions, the view that
bad crops "cause" inflation is ubiquitous, while economists are usually
quick to point out the difference between movements in relative prices
and the general price level. The economists' view is sophisticated and
requires elaboration. For nearly a century, there has been a division of
economic problems into two basic categories:' those concerned with the
value and production of particular commodities relative to other
commodities; and those concerned with the total production of an economy
and the general price level of the output. There is now an extensive
theory of the effect of a decline in the output of a commodity (e.g.,
food) upon its price. Under most conditions, one can safely predict that
an autonomous1 reduction in the output of food will induce a rise in the
price of food relative to other prices. But there is no reason to expect
a rise in the general price level; for that is determined by another
theory a theory which does not concern itself with production of
particular commodities, but rather with total production in the economy.
If food output were a small part of this total production, the economist
would say that the overall price level is not affected by a decline in
food output; the rise in food prices, even if large, would be offset by
slight declines in other prices2 so that the general price level would
remain stable. Food production in Pakistan is, however, no small part of
total output