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RESULTS OF PRODUCT-PRICE STUDIES: A Survey of Nine Product-Price Studies 6

Posted by Connie R. Aponte on May 9, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

As equation (2′) indicates, technological progress can affect equilibrium prices for products and/or factors. The key question is how much does technological progress feed into product-price declines? Consistent with their assumption of the United States being a small price-taking economy, LS assumed zero pass through from tfp growth to product prices. Leamer explicitly relaxes this assumption by considering pass-through rates (identical across all industries) of both zero and one from technological progress to value-added product prices (i.e., P less the cost-share-weighted prices of intermediate inputs). Having controlled for some effect of tfp on product prices, Leamer then assumes that the amount of actual product-price changes not accounted for by technological progress can be attributed to what he terms “globalization.” He does not attribute these globalization price changes to anything more specific such as trade barriers or foreign developments communicated to U.S. product prices through the U.S. terms of trade.

Leamer thus distinguishes two forces affecting U.S. factor prices: technological progress and globalization price changes. The relative magnitude of these forces depends on how large a passthrough coefficient from technology to product prices is assumed. Leamer uses regressions to estimate a link from these forces to factor prices. For technology changes Leamer pools all industries to estimate the following, online payday loan direct lenders

w6591-7
where l is the pass-through coefficient from technology to value-added product prices. Similarly, for “globalization” price changes Leamer pools all industries to estimate the following,

w6591-8
where Pj* + (l x TFPj*) is the vector of globalization price changes.

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