The Economics of Price Scissors

39 Pages Posted: 7 Jul 2004 Last revised: 31 Aug 2010

See all articles by Raaj Kumar Sah

Raaj Kumar Sah

University of Chicago

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: June 1983

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

Sah, Raaj Kumar and Stiglitz, Joseph E., The Economics of Price Scissors (June 1983). NBER Working Paper No. w1156. Available at SSRN: https://ssrn.com/abstract=305540

Raaj Kumar Sah

University of Chicago ( email )

Chicago, IL 60637
United States
+1 773 288 1117 (Phone)

Joseph E. Stiglitz (Contact Author)

Columbia Business School - Finance and Economics ( email )

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