WHAT IS Price Scissors
Price scissors is an economic phenomenon in which the value of one set or sector of a group falls below the value of other sets within the other group. Often the term is used when discussing domestic terms of trade between agriculture and industry. Historically, price scissors have occurred when a country's exports drop drastically in value while its imports remain relatively stable. This phenomenon can cause chaos as individuals do not expect prices to take such wild and opposite directions from the norm.
BREAKING DOWN Price Scissors
Price scissors draws its name from its graphical illustration; it was coined by Leon Trotsky in response to the Scissors Crisis. With time on a horizontal axis and price level on a vertical axis, the plotting of industrial and agricultural prices on the graph will look like a pair of scissors, meeting at a juncture and then sharply moving in opposite directions. The substantive economic effects of this are best illustrated with an example: if a country is a net exporter of dairy products and a net importer of crude oil, a large price drop in the worldwide value of milk combined with a sharp increase in the value of a barrel of oil would cause a price scissors. In this case, the domestic economy struggles to cope with the burden of paying much more for crude oil while being unable to sell dairy products at the prices with which they are accustomed.
Historical Examples of Price Scissors
The Scissors Crisis in the Soviet Union is a primary historic example of the price scissors phenomenon. In 1923, during the New Economic Policy, the prices of industrial and agricultural goods shot in opposite directions, reaching peak divergence at agricultural prices falling 10 percent lower and industrial prices rising 250 percent higher than prices a decade earlier. Correspondingly, Russian peasants' incomes fell, making it harder for them to buy manufactured goods. Peasants, in turn, stopped selling their produce and moved to subsistence farming, which sparked fears of widespread famine. The Scissors Crisis had a few causes. For one, the government, in a misguided attempt to address the threat of famine, fixed grain prices at artificially low levels. Furthermore, there was a surplus of agricultural product to industrial product: agricultural production rebounded quickly from the famine and civil war that followed the revolution of 1917. In contrast, infrastructure damaged or destroyed by the war meant rebuilding, significantly slowing industrial production levels.
The Scissors Crisis sparked widespread worker strikes within major Russian cities. The government eventually cut industrial production costs through rationalization, wage-cutting, layoffs, and promotion of consumer cooperatives. This alleviated the major disparity in prices and ended the crisis.