Tuesday, February 15, 2011

Higher Food Prices Good For U.S. Economy

Are higher prices good or bad? That depends on whether you are a buyer or a seller. It is good if you are a buyer and receives higher prices (though this of course assumes that the price increase isn't associated with a lower sales volume) and bad if you are a buyer.

That is why for example higher commodity prices are good for net exporters of commodities, such as Canada, Australia, Russia, Norway and Brazil while it is bad for net importers like the United States, China, Japan and Germany.

However, for the United States there are one group of commodities where it benefits from higher prices; namely food. As is hinted by the fact that agricultural exports are a separate category in the export price index but not in the import price index and as can be seen directly in trade statistics, the United States is a net exporter of agricultural products. This means that its terms of trade, and therefore also its real aggregate national income will increase whenever food prices rise.

Of course, most Americans lose from higher food prices, but for American farmers and others benefiting from agricultural production the recent increases in food prices are very good and their gains exceed in dollar terms the losses of American food consumers.