Falling Terms of Trade and the Exodus from Agriculture: Bangladesh Perspective*

Abstract

This article investigates the real income dynamics of agriculture and non-agriculture to explain why farmers are increasingly switching out of agriculture. The study assesses the potential role of price levels and volatility in pushing farmers out of agriculture. We estimate the terms of trade (ToT) of agriculture against the manufacturing sector based on the ratio of the agricultural gross domestic product (GDP) deflator and the manufacturing/industrial GDP deflator. Our results show a persistent deterioration in agricultural ToT, indicating that agricultural prices have risen more slowly than industrial and service sector prices. This imbalance reduces agricultural households’ real incomes while raising consumption costs, incentivising sectoral shifts. Moreover, it has far-reaching implications for the overall shape and size of the sectors in this economy. It is almost instantaneously that, as long as the cost of switching sectors is minimal, people will switch from a sector with lower rewards to another sector where the reward is higher. However, ToT alone does not fully capture the complexity of farmers’ decisions. Supplementing our analysis with recent commodity price data from the Department of Agricultural Marketing (DAM) of Bangladesh, we present that beyond declining price levels, heightened price volatility and resulting income instability further erode the attractiveness of agriculture. Together, these factors contribute to the economy’s structural transformation by steadily pushing farmers out of agriculture.