Macroeconomic Adjustments in a Dual Economy under Policy Controlled Domestic Terms of Trade

Jorn Rattso

Indian Economic Review, 1988, vol. 23, issue 1, 45-59

Abstract: The terms of trade between agriculture and industry have political and economic importance in developing countries. This paper discusses the economic adjustment mechanisms in a dual economy when government controls the domestic terms of trade. This analysis may be relevant for India, where government tries to implement the 'parity principle', i.e., a fixed price ratio between goods sold and bought by agriculturists. Alternative assumptions regarding equilibrating mechanisms in the agricultural markets and macroeconomic closure rules are studied. It is shown that turning terms of trade against agriculture to increase investment and growth may be risky. Macro-economic imbalances may follow if the agricultural sector does not grow adequately to support overall economic growth.

Date: 1988
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