Explain possible reasons for an increase in the world price of rice.

Climate issues have affected the rice yield in Vietnam the past 2 years, contributing to the rise in domestic price of rice.

a. Explain possible reasons for an increase in the world price of rice. [10]

b. Evaluate the economic rationale behind and possible impacts of the Thai government’s price controls on rice. [15]

Essay Breakdown

Factors: Factors that increase price of rice

Markets Involved: Rice (World)

Concepts Required: Demand & Supply: Factors, Single and Simultaneous Shifts

Introduction

Vietnam is the second largest exporter of rice and 80% of rice grown in the country is along the Mekong Delta.

The Price Mechanism is a system whereby the demand and supply forces in a market determine the prices of goods and services, and the changes therein. The rise in price, as explained in the quoted text, had surfaced due to a fall in the supply. Supply refers to the ability and willingness of a producer to sell goods and services at various price levels, ceteris paribus. Apart from supply, there are demand factors that could also have contributed to the outcome. Demand refers to the degree to which a consumer is willing and able to purchase a specific good or service, ceteris paribus.

Fall in Supply

Climate

1.      (RWA) According to the UN, the vast flood plain of the Mekong Delta provides for Asia’s most fertile agricultural zones.

2.      In the past 2 years, the rising sea levels (farms are flooding and farmers are losing their land) and temperature increases, attributed to climate change, have caused production of rice to fall, reducing supply.

Increase in Demand

Population

1.      As the countries of China and India continually experience population growths, the demand for rice increases.

2.      There now exists a larger demand competing for the global supply of rice.

Rising Affluence

1.      Rising affluence would increase purchasing power, allowing more consumers to purchase rice.

Conclusion

A combination of factors resulting in both a fall in supply and increase in demand results in the increase in the world price of rice.

Comments

This question is about the world price of rice and not the price of rice in Vietnam. Thus, events in Vietnam would play a role in the world price for rice, but is not the only factor.