Explain the terms of trade between agriculture and industry
Answers
Answer:
Terms of trade between agriculture and industry can be thought of as the ratio of prices of agricultural products to that of prices of industrial products. This is analogous to Interntional Terms Of Trade that are given by the formula: (Price of exports)/ (price of imports). pls follow me
Answer:
The growth process is generally initiated in the agricultural sector. In the initial stages, labour and capital are transferred from the agricultural sector to the industrial sector. Under these circumstances, most of the economists believe that there is a strong possibility of the terms of trade turning in favour of agriculture as development proceeds.
There are many reasons for it. Per capita output and income will be increasing at a much more rapid pace in the industrial sector than in the agricultural sector. This will bring about relatively greater increase in the demand for’ agricultural products than that for the industrial products
Relatively more rapid rate of technical progress in the industrial sector will bring about a larger increase in the supply of industrial products than in that of agricultural products. Both these developments will make agricultural products cost more in terms of the industrial products. With this change, capital flow from the agricultural sector to the industrial sector will slow down. Rate of growth of the industrial sector will then begin to fall.
There is a further possibility that capital may move from the industrial sector to the agricultural sector as marginal productivity of capital becomes higher in the agricultural sector. This is what was experienced at one time in Southern United States.
And there are various models which try to show that terms of trade will change in favour of agriculture as development proceeds. The model given by W.A. Lewis only mildly concludes as such.
This is because the model does not intensively analyse the changes taking place in the agricultural sector. Model given by Fei and Ranis and that by Jorgenson strongly bring out the fact that the terms of trade will change in favour of agriculture as the industrialisation goes ahead.Jorgenson’s model is similar to that of Fei and Ranis in contents with the only difference that whereas Fei and Ranis feel that terms of trade change only after the surplus labour in the agricultural sector has been exhausted, Jorgenson is of the view that terms of trade start changing in favour of agriculture as soon as the industrialisation starts through transfer of labour and capital from the agricultural sector to the industrial sector.
When terms of trade turn against industry (i.e., in favour of agriculture), industrial development is likely to suffer. And, if there is no interference by the state, there is every likelihood that the terms of trade will turn against the industrial sectors as the development proceeds.
Many economists have therefore suggested that steps should be taken to keep the terms of trade against agriculture in the initial stages, through artificial means like price control etc. or through heavy taxes on the agricultural sector.
It may be noted, in this connection that some economists like Nasir Ahmed Khan and Okhawa are of the view that resources from agricultural sector (saving etc.) cannot be mobilised easily through taxation, borrowing or small savings. And even if these measures are successful, the yield will be quite small.