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The Economics of Price Scissors

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  • Raaj Kumar Sah
  • Joseph E. Stiglitz

Abstract

We analyze consequences of changing the terms of trade between agriculture and industry on capital accumulation and on welfare of workers in different sectors. The issue was central to Soviet industrialization debate and it remains important in today's developing world. Through a simple general equilibrium model, we show that a price squeeze on peasants increases accumulation (as Preobrazhensky argued), but it makes both urban and rural workers worse-off (contrary to Preobrazhensky's contention). The desirable changes in terms of trade are shown to depend on intertemporal valuations, but, within a range, not on rural-urban welfare trade-off. Our characterization of the optimal terms of trade is remarkably simple, in which the roleof welfare weights and of relevant empirical parameters are easily as certained.We then extend our analysis to economies with labor mobility and unemployment and, using a simple model with rigid industrial wage, show that the optimal terms of trade entail a tax on urban sector,a subsidy to rural sector, and a level of urban employment such that the urban wage exceeds the marginal product of urban worker.

Suggested Citation

  • Raaj Kumar Sah & Joseph E. Stiglitz, 1983. "The Economics of Price Scissors," NBER Working Papers 1156, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1156
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    Cited by:

    1. Bai, Chong-En & Tao, Zhigang & Tong, Yueting Sarah, 2008. "Bureaucratic integration and regional specialization in China," China Economic Review, Elsevier, vol. 19(2), pages 308-319, June.
    2. Justin Yifu Lin & Miaojie Yu, 2008. "The Economics of Price Scissors : An Empirical Investigation for China," Governance Working Papers 22019, East Asian Bureau of Economic Research.
    3. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042 Elsevier.
    4. Cao, Kang Hua & Birchenall, Javier A., 2013. "Agricultural productivity, structural change, and economic growth in post-reform China," Journal of Development Economics, Elsevier, vol. 104(C), pages 165-180.
    5. Braverman, Avishay & Guasch, J. Luis, 1989. "Rural credit in developing countries," Policy Research Working Paper Series 219, The World Bank.
    6. Dethier, Jean-Jacques & Effenberger, Alexandra, 2012. "Agriculture and development: A brief review of the literature," Economic Systems, Elsevier, vol. 36(2), pages 175-205.
    7. Yanagihara, Toru & Hisamatsu, Yoshiaki, 1998. "Development strategy reconsidered : Mexico, 1960-94," Policy Research Working Paper Series 1889, The World Bank.
    8. repec:ilo:ilowps:286955 is not listed on IDEAS
    9. Torvik, Ragnar, 1997. "Agricultural supply-led industrialization: A macromodel with sub-Saharan African characteristics," Structural Change and Economic Dynamics, Elsevier, vol. 8(3), pages 351-370, August.
    10. Huff, Gregg & Angeles, Luis, 2011. "Globalization, industrialization and urbanization in Pre-World War II Southeast Asia," Explorations in Economic History, Elsevier, vol. 48(1), pages 20-36, January.
    11. Rohini Pande, 2005. "Profits and Politics: Coordinating Technology Adoption in Agriculture," Working Papers 922, Economic Growth Center, Yale University.
    12. Bai, Chong-En & Du, Yingjuan & Tao, Zhigang & Tong, Sarah Y., 2004. "Local protectionism and regional specialization: evidence from China's industries," Journal of International Economics, Elsevier, vol. 63(2), pages 397-417, July.
    13. Carter, Colin A. & Zhu, Jing, 2009. "Trade Liberalization and Agricultural Terms of Trade in China: Price Scissors Revisited," 2009 Conference, August 16-22, 2009, Beijing, China 51636, International Association of Agricultural Economists.
    14. Pande, Rohini, 2006. "Profits and politics: Coordinating technology adoption in agriculture," Journal of Development Economics, Elsevier, vol. 81(2), pages 299-315, December.
    15. Fiszbein, Ariel, 1992. "Do workers in the informal sector benefit from cuts in the minimum wage?," Policy Research Working Paper Series 826, The World Bank.
    16. Yousef, Tarik M., 2000. "The Political Economy of Interwar Egyptian Cotton Policy," Explorations in Economic History, Elsevier, vol. 37(4), pages 301-325, October.

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