TY  - JOUR
AU  - Sah,Raaj Kumar
AU  - Stiglitz,Joseph E.
TI  - The Economics of Price Scissors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1156
PY  - 1984
Y2  - August 1984
UR  - http://www.nber.org/papers/w1156
L1  - http://www.nber.org/papers/w1156.pdf
N1  - Author contact info:
Raaj Sah
University of Chicago
1155 East 60th
The Harris School
Chicago, IL  60637
E-Mail: r-sah@uchicago.edu

Joseph E. Stiglitz
Uris Hall, Columbia University
3022 Broadway, Room 212
New York, NY  10027
Tel: 212/854-0671
Fax: 212/662-8474
E-Mail: jes322@columbia.edu
AB  - 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.
ER  -