Market failure — practice question

Agriculture made up 17% of India’s Gross Domestic Product (GDP) of US$1890 billion in 2013. GDP had risen from US$1769 billion in the previous year. The country’s population went up from 1.22 billion in 2012 to 1.26 billion in 2013. In 2013, India and the US were both among the world’s top ten wheat producers. India came third with output of 95 million tonnes, whereas the US was fourth with output of 62 million tonnes. In 2013, just 1.6% of the US labour force worked in agriculture, compared with 45% in India. Agricultural subsidies have fallen in the US, but they are still high in India. The Indian Government believes support for farmers matters for national security and that food subsidies help to cut poverty. From 2010 to 2013, the Indian Government spent US$15 billion subsidising fertilisers to improve soil fertility. Fertiliser subsidies have raised wheat output, but they have also polluted rivers. The Indian Government believes that, over time, its agricultural sector will become more efficient and that subsidies will be needed less. It expects workers to become better educated and the quantity of capital equipment used in agriculture to increase. Some US economists have challenged this optimism. They note that the state-owned Food Corporation of India had to purchase 30% of the country’s yearly wheat harvest and that India had a huge stockpile of unsold wheat in 2014. Trade between India and the US is growing. US citizens are purchasing a larger amount of goods and services from India. For example, because life expectancy in the US, which had already reached 79 years in 2014, is rising, imports of Indian medicines into the US are increasing. Several factors will shape the pattern of trade between the two countries. These include the exchange rate between the US dollar and the Indian rupee. The value of the US dollar is set by market forces, so the long-term trend may fluctuate.