PRICE POLICY, PROFITS AND LAND RENTS IN A FLEX-PRICE/FIX-PRICE MODEL OF THE U.S. ECONOMY (UNITED STATES)

The allocative and distributional consequences of changes in the relative price of primary products are explored using a classical, multisectoral flex-price/fix-price model. Primary commodity prices are set by government price policy, while industrial prices generally follow some markup or profit equalization pricing rule. The intrasectoral division of net income between profits and rents receives special attention because of its important implications for sectoral investment rates and for the distribution wealth. The problem of land rents with positive profit rates is introduced in a simple one sector model. When the rate of profit is zero, rent promotes the efficient allocation of land by minimizing the use of labor per unit of output. However, if profits are positive, several types of inefficiency may occur. High profits may lead to output shortages or to the adoption of techniques which"waste" land or labor. Moreover, multiple equilibria may occur in which one method appears to be most efficient when profits fall, while another technique is adopted when profits rise over the same range.;Finally, a multisector, flex-price/fix-price version of the model is developed and implemented using U.S. data for 1972-1977. Predicted grain land prices and rents compare favorably with those observed during this period. Alternative solutions of the model indicate that increases in the relative price of petroleum based products explain much of the extraordinary increase in land prices observed during this period. A second set of solutions show that raising grain prices when wages are indexed to the CPI tends to reduce the effectiveness of price policy, while indexed import prices create a relative price bias which favors rents at the expense of profits.;Adding an industrial sector to the model, several macroeconomic constraints on the effectiveness of terms of trade policy are investigated. For a broad class of technologies, both wage indexation and flexible exchange rates tend to reduce responsiveness of primary sector profits to price increases. However, the magnitude and direction of this effect depends crucially on the primary sector technology. Several cases of "fixed profit equilibrium" are identified in which raising the relative price of primary commodities has no effect on the rate of profit in that sector.