The Prices of Material and Intermediate Inputs in UK Manufacturing: Identifying the Contributions of World Prices and Domestic Factor Costs

Posted: 14 Oct 2009

See all articles by Giuliana Battisti

Giuliana Battisti

Warwick Business School

P. Stoneman

University of Warwick Business School

Date Written: April 1, 2007

Abstract

In this article, we explore the patterns and determinants of the prices of raw material and intermediate inputs (MIIs) to UK manufacturing as measured by the net (n) and gross (g) producer price indexes of materials and fuels (PIMF). Despite the importance of MII in total manufacturing costs their prices have been little studied. It is shown that these prices are Granger independent of the demand for such inputs and thus a simple cost based model of price determination is constructed. This model forecasts that MII prices are functions of world prices for oil, commodities and semi-manufactured products intermediated by exchange rates and duties, domestic factor prices and a trend reflecting domestic technical change, changes in mark ups and change in weights. By the means of an error correction representation it is found that PIMFn and PIMFg, in the long and short-run, are more sensitive to overseas-determined prices (of oil, commodities and semi-manufactured products) than domestically determined prices (labour, capital and the trend). It may be argued that to some considerable degree therefore the prices of material and intermediate inputs in UK manufacturing will not be particularly sensitive to policy actions.

JEL Classification: E3, C00

Suggested Citation

Battisti, Giuliana and Stoneman, P., The Prices of Material and Intermediate Inputs in UK Manufacturing: Identifying the Contributions of World Prices and Domestic Factor Costs (April 1, 2007). Applied Economics, Vol. 39, No. 7, pp. 859-882, April 2007, Available at SSRN: https://ssrn.com/abstract=1487133

Giuliana Battisti (Contact Author)

Warwick Business School ( email )

Scarman road
Coventry CV4 7AL
United Kingdom

P. Stoneman

University of Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3038 (Phone)
+44 24 7652 3719 (Fax)

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