Interpretation of Cost-Price Ratios
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The usefulness of movement in costs and prices (sometimes termed the "cost-price squeeze") has been challenged by a number of authors. Despite this, a theme which remains common to some recent articles is that a decline in the ratio of prices received to prices paid denotes a situation which must be overcome. A simple model is used to demonstrate why movements in aggregate costs and prices tell us very little about the state of the agricultural sector and, in particular, about farm income. Results of the model are examined in conjunction with actual movements in selected agricultural indicators over the past twenty-five years.