Aggregate Demand and Relative Prices
One of the key reasons for China's success in mobilizing resources and raising productivity since 1978 has been the regulation of aggregate demand by central government. More precisely, as this chapter shows, the increase in demand that occurred at the start of the 1980s caused an acceleration in the growth rate. This macroeconomic policy was supplemented by a dramatic increase in the relative price of agricultural products in 1979. This altered the intersectoral terms of trade, thereby creating a surplus within the agricultural sector for re‐investment and––because farm production became profitable for the first time in almost a decade––provided a direct incentive for farmers to maximize output.
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