This study examines the price structure of Taiwan by stage of processing, as advocated by Popkin. Using regression analysis, it attempts to uncover the determinants of various wholesale prices, consumer prices, and GDP deflators. The wholesale prices analyzed are those for material, capital goods, durable consumer goods, and nondurable consumer goods, all made by domestic producers. The consumer prices are those for services, nondurables, and durables. The GDP deflators are those for private consumption, government consumption, construction, other fixed investment, changes in inventories, exports, and imports.
Our regression results indicate that the output price of a certain stage is determined by the input price (output price of the preceeding stage), other costs (unit labor cost and user cost of capital), and certain demand factors (income, money supply, unemployment rate, domestic business conditions, and capacity utilization rate). The importance of each determinant depends on the stage of production under investigation. The results also show that the effects of import prices are smaller and slower than those of domestic prices. Besides, export prices are determined mainly by world prices and world demand. Taiwan’s exporters exert little influence on the price of their products.
Since most explanatory variables are not truly exogenous, it is argued that the price model presented here should be integrated into a complete macro model of the Taiwanese economy.
