Price determination in Australia : a disaggregated approach.

The primary aim of this thesis is to obtain estimated sectoral price equations for Australia using quarterly data for the period 1960-61 to 1972-73. The secondary aim of the study is to use the estimated price equations obtained to make a sector by sector comparison of the determinants of sectoral prices and of the lags with which prices respond to these determinants. Aggregate price equations are also estimated and compared with the estimated sectoral price equations in order to determine whether extra information is gained by estimating separate price equations for different sectors. In the first chapter of the thesis some arguments are advanced supporting the view that a sectoral approach to the study of price determination may be necessary to obtain a better understanding of the way in which prices are determined. Before attempting to accomplish the primary aim of this thesis two chapters are devoted to a brief review of the most important price equations studies carried out for overseas countries and for Australia - Chapter 2 contains a survey of the overseas studies and Chapter 3 contains a survey of the Australian studies. It was found that the Australian work was less extensive than the overseas work both as regards the types of disaggregation used and the types of explanatory variables tested. Chapter 3 concludes with proposals for work to be carried out in this study, these proposals consisting largely of proposals for using alternative types of disaggregation and incorporating variables which have been successfully tested overseas but not in Australia. The fourth chapter discusses the data available for carrying out the programme outlined in the preceding chapter. It was found that little of the required data was available and much of the data needed in the regression analysis had to be constructed from available data. As a result of this Chapter 4 contains a rather extensive discussion of the data used and the series constructed are reproduced in an appendix. The discussion of the data revealed that three different types of disaggregation could be used and since the studies reviewed gave little indication as to which type of disaggregation would be the most useful, all three types were experimented with. The regression results for the final demand type sectors are discussed in Chapter 5, the results obtained for consumer goods sectors are discussed in Chapter 6 and the results for geographical sectors are discussed in Chapter 7. It was found that labour costs were the most important determinant of prices. Various types of labour cost variables were tried. Some were adjusted for changes in short-run productivity to form unit labour cost variables and some for changes in long-run productivity to form
ormal\" unit labour cost variables. It was found that the labour cost variables unadjusted for productivity (i.e. minimum wage rate and earnings variables) were the most successful. The only other variable which was consistently significant for all sectors for which it was used is the sales tax and excise variable. Materials costs were significant for some sectors only and of the many types of demand variables tried none were consistently significant although several of the preferred equations included a demand variable. In Chapter 8 the results for the three types of disaggregation are compared and it is argued that additional information concerning price determination in Australia is indeed obtained by using a sectoral approach. It is felt that further work in this area is warranted and that the disaggregation by final demand categories and the disaggregation by consumer categories are likely to be more useful than the geographical disaggregation. However the difficulty of obtaining suitable sectoral data must be balanced against the advantages of using the sectoral approach to the study of price determination."