Working Paper: NBER ID: w1156
Authors: 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.
Keywords: Terms of Trade; Capital Accumulation; Welfare Distribution; Price Scissors
JEL Codes: D33; E61; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| terms of trade against peasants (F16) | increased capital accumulation (E22) |
| price squeeze on peasants (P22) | increased capital accumulation (E22) |
| increased capital accumulation (E22) | decreased welfare of urban workers (F66) |
| increased capital accumulation (E22) | decreased welfare of rural workers (I32) |
| terms of trade (F14) | welfare of workers (J28) |
| price changes (P22) | rural surplus (R19) |
| optimal terms of trade (F14) | tax on urban sector (R51) |
| optimal terms of trade (F14) | subsidy to rural sector (Q14) |