Decomposing Changes in Agricultural Price Gaps

The paper develops a procedure for decomposing changes in agricultural price gaps, defined as the difference between a commodity's domestic producer and border prices. Two decomposition approaches are presented, depending on whether policy allows transmission from changes in trade prices and exchange rates to domestic prices. The methods allow one to isolate and measure the effect on the price gap of changes in agricultural policy versus non-policy variables. The decomposition procedure is demonstrated in an example involving the price gap for Russian poultry in the late 1990s. The results are consistent with the argument that for developing and transition economies, the main cause of changes in price gaps is incomplete transmission of changes in exchange rates to domestic prices, resulting not from policy intervention, but rather from undeveloped market infrastructure.