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November 2002, Vol. 125, No.11
An empirical analysis of price transmission by stage of processingJonathan Weinhagen
In 1978, the Bureau of Labor Statistics began emphasizing the stage-of-processing (SOP) system as the key structure used in analyzing the behavior of producer prices. This system allocates commodities among three categories: crude goods, intermediate goods, and finished goods. Crude goods are defined as unprocessed commodities that are not sold directly to the consumer. Intermediate goods are either commodities that have been processed, but that still require further processing, or nondurable, physically complete goods purchased by business firms as inputs for their operations. Finished goods are commodities that are ready for sale to the final-demand user, either an individual consumer or a business firm.1 The SOP model can be extended to encompass consumer prices by including the Consumer Price Index (CPI) as the fourth "stage of processing."
According to the SOP system, commodities at earlier stages of processing can be considered inputs to commodities at later stages of processing. Economic theory predicts that price changes may be transmitted forward through the stages of processing. The study presented in this article (1) uses econometric techniques to determine the causal directions of price changes by means of the SOP system and (2) examines the stability over time of the causal relationships found.
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1 Handbook of Methods (Bureau of Labor Statistics, 1997), esp. Chapter 14, "Producer Price Indexes."
Consumer Price Index
Producer Price Indexes
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