How might a fall in production of olive oil affect Spanish economy. (8)
Olive oil is an important commodity, therefore farmers are likely to see a fall in revenue because they have less to sell. Therefore, this also results in lower exports and less export revenue for the economy.
However, the fall in production has increased price. Because demand is inelastic, this could actually increase the incomes of farmers, even though they have less to sell. (the % increase in price is bigger than than the % fall in quantity – therefore revenue increases)
It is unclear how significant olive oil production is for the Spanish economy. It is likely to be quite a small sector and therefore the fall in output maybe insignificant.
Farmers also get subsidies from the European Union. This may protect them from falling production, especially now subsidies are not targetted to production.
See also: Common Agricultural Policy of EU