Chapter

The Price Scissors in Closed and Partially Closed Socialist Economies

Raaj K. Sah and Joseph E. Stiglitz

in Peasants versus City-Dwellers

Published in print February 2002 | ISBN: 9780199253579
Published online January 2005 | e-ISBN: 9780191601682 | DOI: http://dx.doi.org/10.1093/0199253579.003.0006
The Price Scissors in Closed and Partially Closed Socialist Economies

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Addresses the same issues as were examined in the previous chapter, i.e. the situation in which there is only one set of prices in rural and urban sectors, but with reference to a closed economy. The central message is that when there are non-traded goods, or when there are binding constraints on the magnitude of trade, the government cannot change one price (the size of the price scissors, i.e. the price of industrial (urban) goods relative to that of agricultural (rural) goods) alone: for the balance between the demand and supply of non-traded goods to be maintained, the price of some other commodity or the level of the urban wage must change. A simple model is presented in which the urban wage adjusts to ensure that the demand for food equals its supply. This has some dramatic effects on conclusions concerning the effects of increasing the size of the price scissors: i.e. increasing taxes on the rural sector. The induced wage adjustments reinforce the positive effects that such taxes have on government revenue, and they more than offset the direct welfare effects of the price changes on the urban sector.

Keywords: agricultural goods; agricultural prices; closed economies; demand; food demand; food supply; industrial goods; models; non-traded goods; partially closed economies; price scissors; prices; pricing policy; rural prices; rural sector; socialist economies; supply; taxation; taxes; trade constraints; urban prices; urban sector; urban wages; welfare economics

Chapter.  8253 words.  Illustrated.

Subjects: Economic Development and Growth

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