Seminar 2:

Decomposition analysis and its utility

in Agricultural Economics research.
Student: ADITYA K.S., PALB (1094)

Major Advisor: Dr. T.N. Prakash Kammardi

1
 ROAD MAP……
Sl. No Particulars
1
Introduction
2
Relevant terminologies
3
Hazells decomposition- the method
4
Study I: Instability in India’s cereal production- Peter
B Hazell
5
Study II : Hazell decomposition applied to GR from
arecanut
6
Bisaliah’s output decomposition model
7
Study I: Application of Bisaliah’s decomposition
model
8
Conclusion
9
Reference

2
 Introduction
• Decomposition is the act of splitting a time
series or other system into its constituent parts.
• Most commonly used methods of
decomposition are Hazell’s decomposition
and Bisaliah’s decomposition.

3
 • Mean:
• Variance:
• Coefficient of variation:
• Technical change:
• Neutral technical change:
• Non neutral technical change:
• Instability:

4
 Peter, B. R. Hazell in 1982.

 Primarily developed to study instability in Indian food grain production.

 Instability in production would mean that there will be price fluctuation.

 It will cause varying returns to farmers.

5
 To measure instability panel data at farm level is needed which is

unavailable in most cases.

 So Hazell developed statistical methodology to analyze instability using

time series data.

 Instability is measured as the change in average production and variance

of production between two periods of time.

6
 The model

• Let Q denote the production, A the area sown,

and Y yield per unit area.
•
• Where = Mean area
=Mean yield
• Similarly Variance can be written as

7
1. Decomposition of change in
average production E (Q)

-
8
 Table 1: Sources of change in average production

Sl.No Sources of Change Symbol Component of change

1 Change in mean yield

2 Change in mean area

Interaction
3
between change
in mean area and mean
yield

4 Change in area
– yield
Covariance 9
 Increase in Area Simultaneous Increase
in Yield and area
With the assumption that Cov(A,Y)=0

Y
A2
B C A
A1 Increase in Yield
AAA++BB+D+C D
A+D

Y1 Y2

Fig1: Diagrammatic representation of change in mean production

10
Hypothetical illustration….

Variable Base period Terminal Change

period
Area 3 7 4
Yield 4 3 -1
Production 12 21 9

A*Y1=4*4=16 Y*A1=-1*3= -3

A Y=4* -1= -4

P= 16-3-4=9

11/40
The pure
effect :

The interaction effect

The variability effect

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 TABLE 2: DECOMPOSITION OF CHANGE IN VARIANCEOF PRODUCTION
Sl. Source of change Symbol Components of change
No
1 Change in mean yield
2 Change in mean area
3 Change in yield variance
4 Change in area variance
5 Interaction between changes in mean yield
and mean area
6 Change in area-yield covariance

7 Interaction between changes in mean area and

yield variance

8 Interaction between changes in mean yield

and area variance

9 Interaction between changes in mean area and

yield and changes in area-yield covariance

10 Change in residual

Source : Hazell 13
Study I:Instability in Indian
Food grain Production- Peter
B.R Hazell (1982)
Objective: To decompose Average production and variance of production to its
constituent parts taking
value of Ist Period as base.

Data source: Area and yield of major cereal crops were

collected for period
1954 to 1977 from DES and Ministry Of Agriculture.

Ist period: 1954 to 1964 II nd period: 1967 to 1977

14
15/40
 Table 3 : Sources of growth in average production of cereals in India
Sl.N Sources of Change Symbol Rice Wheat Bajra (%) Barley Jowar Maize Ragi (%) Total
o (%) (%) (%) (%) (%) cereals
(%)

1 Change in mean 47.92 38.05 76.56 1203.89 153.05 13.36 95.87 47.69
yield

2 Change in mean 44.65 36.62 19.76 -677.73 -35.71 69.50 -5.71 36.52
area

3 Interaction
between change in
mean area and 2.23 0.53 1.21 -22.92 6.62 2.06 3.58 1.42
mean yield

4
Change in area –
yield Covariance
5.20 24.80 2.47 -203.23 -23.95 15.06 6.26 14.30

Source: Hazell (1982) 16

Table 4: Sources of instability in cereal production from India
Sl. Source of Symbol Rice Wheat Bajra Barley Jowar Maize Ragi Total
No change (%) (%) (%) (%) (%) (%) (%) cerea
l s
(%)
1 Change in
-0.69 5.20 0.81 15.08 2.71 0.55 1.24 1.43
mean yield
2 Change in
1.68 15.75 -0.15 -46.59 -3.81 3.92 2.34 8.75
mean area
3 Change in
yield 40.05 1.12 57.98 -7.88 56.79 48.17 58.66 37.20
variance
4 Change in
area 5.20 6.86 3.09 -76.50 5.28 -7.08 20.44 5.97
variance

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Source: Hazell (1982)
Contd…………..
Sl. Source of Symbol Rice Wheat Bajra Barley Jowar Maize Ragi Total
No change (%) (%) (%) (%) (%) (%) (%) cereals
(%)
5 Interaction
between changes
in mean yield 1.23 -1.65 -0.15 -0.73 -0.19 -0.19 0.13 0.22
and mean area
6 Change in area-
yield covariance
31.89 11.98 18.52 -8.27 36.12 19.13 24.32 31.04
7 Interaction
between
changes in 18.08 10.95 8.99 8.55 6.13 28.47 -9.14 7.34
mean area and
yield variance
8 Interaction
between
changes in 2.19 14.29 2.27 52.22 3.87 0.60 5.34 2.92
mean yield and
area variance
9 Interaction
between
changes in
mean area and 13.17 31.63 8.43 2.22 8.02 7.56 0.67 12.30
yield and
changes in area-
yield covariance
10 Change in
residual
-12.79 3.88 0.21 8.91 -14.91 -1.14 -3.99 -7.16
 Summary of findings
With improvement of technology yield and consequently production
has
increased so the case with instability.

Variance in yield is the major driver of instability

Input responsiveness of new technologies can be a reason for it

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Study II: Decomposition of GR
from arecanut: Application of
Hazell’s decomposition model.
(Source: Author)

• Hazell’s decomposition can be applied to any time

series which is in turn product of two variables.

Production X Imputed price. =GR

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 Data and methodology
• Period of study: 1995 to 2010
• Base period : 1995-2002
• Terminal period: 2003 to 2010 Data
source:
 Production: Directorate of Economics and
Statistics
 Imputed price: Special Scheme on Cost of
Cultivation of Arecanut in Karnataka
21/40
 Preamble
• Since arecanut is a important commercial crop,
returns from the crop affects the fortunes of
farmer to a greater extent.
• Objective of the exercise is to know the growth
scenario of GR from arecanut over the years in
two representative major areca growing districts.
• It will facilitate us in knowing constituent
sources of change in average gross revenue and
its variance.

22
Possible scenario in Growth of GR
from arecanut

Growth in GR from arecanut with stability Ideal scenario

Growth in GR from arecanut with instability Expected scenario
Declining GR from arecanut with instability Unfavourable scenario

Declining GR from arecanut with stability Unfavourable scenario

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 Results
Table 5: Source of change in average GR from arecanut

Shimoga D.K
Particulars Percentages Percentages
Change in GR -4.10% -18.00%

Change in mean quantity -1086.70 -220.84

Change in mean price 830.12 235.53

Interaction between change in mean quantity

371.30 93.52
and mean price
Change in quantity-price Covariance -14.72 -8.21

Total 100.00 100.00

24
Source : (Author)
 Table 6: Source of change in variance of GR from arecanut

Shimoga D.K
Particulars
Percentages Percentages
Change in Variance 50.38 -75.00
Change in mean price -66.73 -0.98
change in mean quantity 780.76 9.78
change in P variance -49.12 132.18
Change in Q variance 117.53 -21.01
Interaction change in mean price and change in mean
Quantity 10.32 -4.26
Change in price quantity covariance 68.56 -30.77
Interaction between change in Price and Q variance -66.59 14.03
Interaction between change in Q and Price variance -1172.74 -2.46
Interaction between changes in mean price and
quantity and changes in price-quantity covariance -3.22 5.97
Residual change 481.23 -2.46
Total 100.00 100.00 25
Source : (Author)
 Summary of
findings
• GR from arecanut has declined in terminal period
in both districts.
• The major contributor of this decline is price and
its interaction with quantity produced.
• Since GR declined, not much
importance to be given to changes in
variance.
• Variance in Shimoga increased while that of D. K
decreased.

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 Advantages and limitations of
Hazells decomposition model
Advantages Limitations
• No assumption on • Data oriented methodology.
distribution. • The components of change
• Useful in instability analysis in variance are more of
when used in combination statistical entities and are
with other measures. difficult to interpret and
• Helpful in identifying draw policy implications.
drivers of change.
• Can be applied in variety of
situations.

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 II. Output decomposition
model-Bisaliah (1977).

• Productivity difference between potential farm and

farmer’s field will be attributed to different sources.
• Change in productivity could be better explained by
changes in the parameters which define the production
process.
• With the advancement of technology the output
increases.
• But the increase in output cannot be solely
attributed
to technological change.

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 Increase in output due to higher input
M usage
T
R
L
Q K Non neutral technical change

P Neutral technical change

J

A B
Figure 2: Diagrammatic representation of technical change
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Steps

Fit Cob- Douglas type production function for two technologies

a a
separately b b
Y1 a0x11 1x 21 2 Y2 bx 1
x 2
0 12 22

Fit a pooled regression function with dummy for technology

c c
Y c0x1 1 x2 2 dc3 Dummy significant

Mathematical manipulation to decompose productivity difference

lnY2 lnY1

(lnb0 lna0) (b1 a1)lnx11 (b2 a2)lnx12 b1(lnx12 lnx11) b2(lnx22 lnx21)
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 Decomposing productivity
differentials…
a a b b
Y1 ax 1
x
0 11 21
2
Y2 bx 1
x
0 12 22
2

lnY1 lna0 a1lnx11 a2lnx21 lnY2 lnb0 b1lnx12 b2lnx22

lnY2 lnY1 (lnb0 lna0) (b1lnx12 a1lnx11) (b2lnx22 a2lnx21)

Add and subtract (b1 lnX11) Add and subtract (b2

lnX21)

ln(Y2/Y1) (lnb0 lna0) (b1lnx12 a1lnx11 b1lnx11 b1lnx11) (b2lnx22 a2lnx21 b2lnx21
b2lnx21)
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 ln(Y2/Y1) (lnb0 lna0) (b1lnx12 a1lnx11 b1lnx11 b1lnx11) (b2lnx22 a2lnx21 b2lnx21 b2lnx21)

(lnb0 lna0) b1(lnx12 lnx11) (b1 a1)lnx11 b2(lnx22 lnx21) (b2 a2) lnx12

(lnb0 lna0)
Neutral technical (b1 aneutral
Non 1)lnx11 (b2 a2)lnx12
technical bChange
1(lnx12 lnx11) b2(lnx
in output due22tolnx21) input use
higher
change change

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 Neutral
technical (lnb0 lna0)
change

Ln Y2-Ln (b1 a1)lnx11 (b2 a2)ln x12

Non
neutral
Y1 technical
change

Due to
higher b1(ln x12 lnx11) b2(lnx22 lnx21)
input use

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Socio-Economic Impact of Bt Cotton — A Case Study of
Karnataka: V.R. Kiresur and Manjunath Ichangi(2011)

Purpose of using the tool:

1)To know how much productivity difference is
actually due to Bt cotton technology.
2)To know whether the technology change is
more of neutral or non neutral.
3)To know the contribution of various inputs in
increasing the yield of Bt cotton.

34
 Production function used
ln Y = ln b0 + b1 ln S + b2 ln F + b3 ln C + b4 ln P +
b5 ln H + b6 ln B + b7 ln M + ui
Y = Gross returns (Rs/ha) S = Seed
costs (kg/ha)
F = Farm yard manure (tonnes/ha) C =
Chemical fertilizers (kg/ha)
P = Plant protection chemicals (Rs/ha)
H = Human labour (human days/ha) B =
Bullock labour (pair days/ha)
M = Machine time (hours/ha) bj =
Regression coefficients (j=0,1,2…,k)
(k=7), and
ui = Error-term (i=1,2,…,n) (n=30)

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 Table 7: Results of output decomposition model
Sl. No. Percent
Particulars

Total observed difference in output 26.38

Sources of output growth
1 26.56
Technology component
a. -138.81
Neutral component
b. 165.37
Non-neutral component
2 0.32
Input contribution
a. 7.39
Seeds
b. -0.38
Farm yard manure
c. -1.43
Fertilizer
d. 0.08
Plant protection chemicals
e. -2.48
Human labour
f. -0.21
Bullock labour
g. -2.65
Machine
3 26.88 36
Total estimated difference
26.38% N
M

Output

AB
Input
Diagrammatic representation of results

37/41
 Summary of findings

• Bt cotton farmers obtained on an average 26.38 percent

higher output compared to non Bt cotton growers.
• Contribution of technology in this increase in output is
around 26 percent
• Among the components of technological change lion
share is of non neutral technical change.
• Contribution of increased use of inputs towards increase
in output is negligible.

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 Advantages and limitations of
output decomposition model
Advantages Disadvantages
• Very simple tool.
• Actual contribution of • Accuracy of results
technology towards increase depends upon
in output can be known. production functions
used.
• The contribution of various
inputs towards increasing • More of positive than
output can be known. prescriptive.

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 Conclusion
• Decomposition is an art of splitting a given time series
or a system into its constituent parts.
• Very useful in knowing the drivers of change.
• Hazell decomposition is data oriented methodology
with less restrictive assumption, used mainly in
instability analysis.
• Output decomposition model developed by Bisalaih is
used to know contribution of technology in observed
yield difference.
• Since this model is based on production function, it
cannot be free of assumption on
distribution(Parametric).
40/41
• HAZELL, P. B. R., 1982, Instability in Indian foodgrain
production. International Food Policy Research
Institute, Research report 30, Washington, D.C.
• KIRESUR, V. R. And MANJUNATH ICHANGI.,
2011, Socio economic impact of Bt cotton- a case study
in Karnataka. Agricultural Economics Research
Review, 24(1): 67-81.
• PRAKASH, T. N. KAMMARDI, 1997, An Evaluatioin
of arecanut cooperative marketing system in Karnataka,
Ph.D. Thesis (Unpublished), University of Mysore.

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