The economics of price scissors
Raaj Kumar Sah and Joseph E. Stiglitz
American Economic Review, Volume 74, Number 1, March 1984, pages 125-138.
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The authors analyze consequences of changing the terms of trade between agriculture and industry on capital accumulation and on welfare of workers in different sectors. This issue was central to Soviet industrialization debate and it remains important in today's developing world. Through a simple general equilibrium model, the authors show that a prize squeeze on peasants increases accumulation (as Evgeny 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. The characterization of the optimal terms of trade is remarkably simple, in which the role of welfare weights and of relevant empirical parameters are easily ascertained. The authors then extend the 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 the urban sector, a subsidy to the rural sector, and a level of urban employment such that the urban wage exceeds the marginal product of urban workers. (This abstract is from: Journal of Economic Literature, Volume 22, Number 3, September 1984, pages 1454-1455)
Previous working version include:
“The economics of price scissors.” National Bureau of Economic Research, Cambridge, MA. NBER working paper series, Working paper number 1156. June 1983.