Effects of Food Crisis - Assignment Example

Question 1 Food crisis refers to a situation where a nation, a region or the world is unable to meet the food demands of its people using the available land and production means. Several factors may contribute to this problem, among them population explosion, adverse climatic changes, poor implementation of agricultural policies, outbreak of crop diseases among others. (i) Some of the effects of food crisis include soaring food prices, starvation, malnutrition, very high exports and over-reliance on food aid from donors. As illustrated in the graph below when the demand increases while supply remains the same, the demand curve shifts and this leads to a higher equilibrium price which is passed onto the citizens. Figure 1: Price vs quantity demanded and supplied graph when demand curve shifts As the population grows, food demand to feed that population likewise increases. In a free market, increase in demand leads to a parallel increase in food prices as food is an essential commodity. However, during food crisis, food prices go beyond what the poor population can afford since the income levels remain stagnant. Figure 2: Price Vs quantity supplied graph when supply curve shifts (ii) Outbreak of wheat disease Wheat is one of the commonly used food crops. It is produced in wide scale in most countries for their own consumption and the excess is exported. When there is an outbreak of wheat disease production goes down and this lowers the quantity supplied. When this happens the amount sold by the sellers will decrease and the supply curve will shift to the left as the demand curve remains static. The overall effect will be a change in supply and a similar change in the quantity demanded resulting in equilibrium with a lower quantity and a higher price. When supply decreases and demand is the same prices go up. These prices reach to a point where the poor can no longer afford calling for government’s intervention. Quantity of commodity Figure 3: Price vs quantity of commodity Question 2 The macroeconomic impacts of rising prices of food High food prices have adverse effects on an individual nation and the world at large. Slow growth pace When the food prices are very high much of individual and government spending is directed to meeting food expenses leaving little or nothing for investment. When the rate of investment reduces the growth rate reduces. Inflation Increase in food prices may also lead to a rise in the prices of other goods and services. This in return erodes money’s purchasing power as each unit of money buys fewer commodities. Although inflation has both advantages and disadvantages. In actually compounds the problem of growth rate as the loss in stability in money value and monetary items discourages savings and subsequently investments. The extremes of this problem occur when consumers begin hoarding goods in anticipation to future price increases leading to a further artificial shortage of goods in the market. Poor terms of trade Under ordinary circumstances a country will be pleased when it pays less for its imports with respect to the exports it makes to another country. However, when the there is food crisis a country has no option but to rely on food imports to feed its citizens (Krueger et al, 1967). This in turn leads to unfavorable terms of trade as imports exceed the exports at a particular period of time. Unfavorable balance of payments This is the measure of payments that flow between one country and all other countries measured over a given period of time usually after a year (IMF, 2009). It reflects all liabilities and all payments to foreign countries usually referred to as debits and all received payments from foreign countries usually referred to as credits. During food crisis a country tends to rely more on food imports to sustain its people and this will in turn lead to a higher debit than credit. This will imply that such a country will always be owing debts to other countries leaving little resources for development (Begg et al, 2003). Question 3 A recent World Bank study reveals that with an estimated 850 million people short of food worldwide, an additional 33 countries are at risk of social and political instability as a result of higher food prices. To combat this tragedy, many countries have imposed price controls so as to limit the rise in domestic prices. Whenever there is a food crisis the forces of demand and supply which generally lead to price determination fail to work in a free market. This is because the supply is always less than the quantity demanded. This prompts the government to apply price control. This involves setting of a price ceiling on the prices of goods that are essential to consumers in an effort to bring the cost of living to a manageable level. Among the reasons that may lead to the government controlling the prices of commodities include; to sustain the local prices of some products when the price incurred during importation is inferior to the sustained price. This has the effect of weakening the market prices locally as the price of a commodity is a function of the cost incurred to import that particular commodity. Since the government achieves price controls by either fixing a price floor or a price ceiling on a given good or service, the market forces are weakened and play minimal or no role in price determination. This distorts the pricing of goods and services making buyers and sellers to trade on prices that would otherwise not be their preference (Campbell et al, 2008). Since an effective ceiling price must be lower than the equilibrium price the quantity demanded will be higher than the quantity supplied leading to a shortage of the commodity. On the other hand price floor will have an opposite effect when implemented on the same product. Since an effective price floor must be higher than the equilibrium the quantity supplied is higher than the quantity demanded leading to a surplus in the market. Generally speaking, extremes of availability of a given commodity in an economy where price controls are implemented distort the forces of demand and supply. This sends the wrong signals to buyers and sellers in the market which subsequently leads to misallocation of resources (Harrison, 2004). Price controls also face the problem on rigidity and difficulties in enforcement particularly when it one of the commodities involved is an import. When the product involved is an agricultural product, the farmers may opt withdrawing from such a crop whose production expenses are higher than selling price. This has a long term effect on the agricultural industry as many farmers look for more rewarding jobs other than agriculture. Another adversity happens when there is persistence increase in a products cost of production. The true equilibrium price drifts more and more away from the price ceiling paving way for illegal supply of that commodity giving rise to what is normally referred to as ‘black market’. This is one of the causes of food riots all over the world as it leads to some people benefiting so much at the expense of others. In conclusion, price controls might only work well in the short run but fail to get the desired results in the long run since the marginal costs incurred most certainly outweigh marginal benefits. Question 4: Using demand and supply techniques, critically analyze the statement: “Genetically modified crops are the only way to feed world.” Genetically modified foods are produced from the best qualities of each crop with outstanding qualities. Since a majority of them are early maturing and high yielding, they can offer a quick solution to the problem of food shortage particularly in the developing world where this problem is rampant (Hawkes, 2000). Genetically modified foods may not solve food crisis as the educated people still fathom on the implications this technologies have on their health. They have literally refused to embrace them arguing that adequate control measures have not been put in place to avoid putting human health at stake (Halford, 2003). The debate here is food security versus safety of those consuming the foods. The safety of genetically modified foods is questionable to many, arguing that most countries do not have the necessary manpower to test and evaluate their implication on health and the environment (Engel, 1995; OECD, 2004). Many countries have simply not invested enough in research in the field. The companies offering the seeds of these foods may take advantage on the farmers by limiting the quantity of seeds they require and hiking their prices at the expense of the innocent farmers (Sample, 2009). There is therefore a great need to put in place regulations to govern genetically modified organisms. Genetically modified foods can go a long way in solving the food crisis experienced in many countries across the world. They can help stop starvation, particularly in developing countries. However, a lot more must be done in order to ensure the safety of these foods. Scientists need to put in more effort to minimize the side effects of these foods (Freedman, 2003). References Begg, D at al (2003) Economics, Eighth Edition; McGraw-Hill Campbell R et al (2008), Economics: Principles, Problems, and Policies, Mc Graw-Hill Companies Engel, K et al (1995) Genetically Modified Foods: Safety Issues; American Chemical Society Freedman, J (2003) Everything you need to know about genetically modified foods; The Rosen Publishing Group Halford, N (2003) Genetically modified crops; Imperial College Press Harrison, M (2004), Why the Rich Won: Department of Economics, United Kingdom Hawkes, N (2000) Genetically Modified Foods; Copper Beech Books IMF (2009) Food and Fuel Prices; Retrieved October 2, 2009 from http://www.imf.org/external/np/pp/eng/2008/063008.pdf Krueger, A & Sonnenschein, H (1967); “The terms of trade, the gains from trade, and price divergence”, International Economic Review OECD (2004); Challenges and risks of genetically engineered organisms; OECD Publishing Sample, D (2008), Genetically Modified Foods; retrieved October 2, 2009 from http://www.guardian.co.uk/science/blog/2009/jan/23/gm-crops-genetically-modified-food-crisis Read More