Any increment in the prices of goods or services generally leads to an increase in different products prices indices and inflation. This paper examines the cost-push impact of a motor spirit price increment in Iran on different products prices indices and inflation. An Input-Output (I-O) table adjustment approach is applied. Iran input- output table for the year 2001-2002 is used as database. The empirical results of the model show how the cost-push impact of a 25% increment in the motor spirit price leads to an increment in different products prices indices, but the maximum effect of this increment, which is on transportation services prices, does not exceed 0.7492%. In addition, the cost-push effect of this increase on the Production Prices Index (PPI) is estimated at 0.2540%.Input-Output, Motor Spirit Pricing, Price model, Iran.

M. Alejandro Cardenete

Nooraddin Sharify

English

Research Papers in Economics

 
 
    Working papers series 
   Department of Economics 
 
 
   
 
 
WP ECON 07.11 
 
 
 Cost-push impact of motor spirit price on 
price indices and inflation  
 
  
 
 
Nooraddin Sharify  (Mazandaran University) 
M. Alejandro Cardenete (U. Pablo de Olavide) 
 
 
 
 
 
 
 
 
 
JEL Classification numbers: C67, D57, E37, E64. 
Keywords: Input-Output, Motor Spirit, Price Model, Iran.  
 
 
  
 
 
 
 
 
http://www.upo.es/econ 
Cost-push  impact  of  motor  spirit  price  on  price  indices  and 
inflation 
 
Nooraddin Sharify
a.1  and M. Alejandro Cardenete
b 
a Department of Economics, Mazandaran University, Babolsar, Iran.  
b Departament of Economics, Pablo de Olavide University, Seville, Spain.  
 
Any increment in the prices of goods or services generally leads to an increase in 
different products prices indices and inflation. This paper examines the cost-push 
impact of a motor spirit price increment in Iran on different products prices indices 
and  inflation.  An  Input-Output  (I-O)  table  adjustment  approach  is  applied.  Iran 
input- output table for the year 2001-2002 is used as database. The empirical results 
of the model show how the cost-push impact of a 25% increment in the motor spirit 
price leads to an increment in different products prices indices, but the maximum 
effect of this increment, which is on transportation services prices, does not exceed 
0.7492%. In addition, the cost-push effect of this increase on the Production Prices 
Index (PPI) is estimated at 0.2540%. 
                                                 
1 Corresponding author e-mail: nsharify@umz.ac.ir  
 
 
 
 
 
http://www.upo.es/econ 
  2 
I. Introduction 
The parliament negotiation about the government plan in Iran on the motor spirit 
price finally led to a 25% increment in the motor spirit price in what concerns the 
quota and an adjusted price to stimulate consumption from May 22
nd 2007
2. The 
quota and the adjusted price will be assigned by the government in the future. Huge 
amounts of subsidies are annually spent on the motor spirit price for reasons such as 
preventing inflation, guaranteeing welfare, etc. It seems that this increment, as all 
prices increases, influences the products prices indices and inflation in the country. 
In fact, any price increment’s cost-push, irrespective of its origination, can 
influence  all  products  prices  indices  by  direct  and  indirect  ways  through 
intermediate consumption. Although some products may have no direct effect on 
each other, in an economy products usually are indirectly interrelated. Thus, any 
increment in the price of products can influence the price indices of all products 
through direct and indirect effects.  
  Irrespective of the internal or external origination of a price increment, many 
studies have been carried out to examine its impact on the economy. Focusing on 
the  inflation  problem,  several  types  of  models  have  been  elaborated  using 
computable  general  equilibrium  models,  as  in  Dorrodian  and  Boyd  (2003)  and 
Roeger (2005) or an econometric approach, as in Chaudhuri (2001), Driffield et al. 
(2003), Cunado and Gracia (2003) and Molina (2004). Using an I-O price model we 
can  find  works  such  as  Boraty￿ski’s  (2002),  helpful  to  examine  the  direct  and 
                                                 
2 The newspaper of Khaneh Mellat, dated March7
th, 2007, 
http://mellat.majlis.ir/archive/1385/12/16/Default.htm  
 
 
 
 
 
http://www.upo.es/econ 
  3 
indirect effects of an increment in the indirect taxes of the different sectors. Both a 
dynamic and a static version of this model were also employed by Bazzazan and 
Batey (2003) to compare the results of eliminating energy subsidies. In addition, the 
direct effects of an increase in the prices of the different sectors using an I-O price 
model  and  a  Social  Accounting  Matrix  (SAM)  were  studied  by  Cardenete  and 
Sancho (2002) and Cansino et al. (2007), respectively.  
Although econometric or Computable General Equilibrium (CGE) models 
can be employed to study the direct and indirect effects of a price increment on the 
prices of products and inflation, due to the amount of data required to elaborate 
these models, they are ignored in some studies. The most remarkable characteristic 
of the I-O price model is its ability to consider the direct and indirect effects of a 
price increase on the prices indices, but in a case such as that of the motor spirit 
price, which is established once a year and will not be adjusted with respect to any 
changes  in  intermediate  consumption  or  primary  factors  prices,  it  lacks 
consideration of this situation or condition. Also, the so-called direct price effect 
model is unable to consider the indirect effect of any shocks on the price formation.   
Hence, this paper employs an I-O adjustment approach to examine the direct 
and indirect cost-push effects of a 25% increase in the motor spirit products price on 
the prices indices of all products and inflation. As seen in the empirical results of its 
application, one of the advantages of this model is that it enables the researcher to 
consider one or several products prices on a given level. Furthermore, the I-O table 
adjustment model allows the researcher to consider any change in primary factors,  
 
 
 
 
 
http://www.upo.es/econ 
  4 
such as taxes or subsidies for the products that may be obtained from total inputs 
expenditures. This is still another advantage of this model in comparison to others. 
  The  paper  contains  four  sections.  The  analysis  of  the  database  and  the 
research methodology are presented in the next section. The third section includes 
the discussion and the empirical results of the paper. Finally, the conclusion section 
puts an end to it.  
 
II. The Analysis: Data and Methodology  
 
a. The database  
The latest survey based I-O table for Iran corresponding to the year 2001-2002 and 
elaborated by the Iran Statistics Center is employed as a database in this research
3. 
To  study  the  effects  of  a  motor  spirit  price  increment  on  other  products  prices 
indices and inflation, a product to product I-O table is required.  
  Fortunately, use and make tables are available. If U and K stand respectively 
for the technical coefficients of the use and make tables, A, the technical coefficient 
of a product to product I-O table is calculated as follows:  
 
                                                 
3  Input-Output  Table  for  the  year  2001-2002  (2006),  Iran  Statistical  Center, 
Management & Planning Organization, I. R. Iran.  
 
 
 
 
 
http://www.upo.es/econ 
  5 
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
=
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
´ + + ´ + ´ ´ + + ´ + ´
´ + + ´ + ´ ´ + + ´ + ´
=
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
´
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
= ´ =
nn n n
n
n
mn nm n n n n m nm n n
mn m n n m m
mn m m
n
n
nm n n
m
m
a a a
a a a
a a a
k u k u k u k u k u k u
k u k u k u k u k u k u
k k k
k k k
k k k
u u u
u u u
u u u
U K A
￿
￿ ￿ ￿
￿
￿
￿ ￿ ￿
￿ ￿
￿ ￿ ￿
￿
￿ ￿ ￿
￿
￿
￿
￿ ￿ ￿
￿
￿
2 1
2 22 21
1 12 11
2 2 1 1 1 21 2 11 1
1 2 12 1 11 1 1 21 12 11 11
2 1
2 22 21
1 12 11
2 1
2 22 21
1 12 11
  ( 1) 
 
  Then the product to product table is calculated through equation (2): 
Ù
´ = Z A X   (2) 
   
 
where X refers to the intermediated transaction between products in the production 
stage and 
Ù
Z is the diagonal matrix of the total production of commodities.  
Thus, considering the final demand and primary factors parts together with 
the intermediated transaction part, the product to product table is perfectly defined.  
 
b. Methodology 
Since the input-output table is based on the value of goods or services, it is expected 
that any change in primary factors, imports or the amount of different kinds of taxes  
 
 
 
 
 
http://www.upo.es/econ 
  6 
or subsidies, if they are not compensated by changes in other factors, will relatively 
affect  the  total  inputs  value  of  products.  Given  the  constancy  in  the  level  of 
products, it seems this is the origin of any increment in the prices of products. 
  It  is  worthwhile  noting  that,  since  products  are  consumed  either  as 
intermediate  consumption  for  other  goods  and  services  or  as  final  demand,  the 
increment of prices leads to an increase in the expenditure on intermediate and final 
consumption  goods.  It  is  expected  that  an  increase  in  the  expenditure  on 
intermediate  products  will  lead  to  a  new  increase  in  the  total  inputs  value  of  a 
greater number of products. Hence, this can be considered as a new effect of the 
increase in the prices of products.  
   The new increase in the prices works as the previous one. But since the 
original increase was partly absorbed by the final consumption, it is expected the 
effects of the new increase will be less than those of the former one. This process 
can continue until changes in the prices are ignored.   
  In fact, the model runs based on this process. An original increase in primary 
factors, imports or the volume of different kinds of taxes or subsidies leads to a 
relative increase in the total inputs of the related products and to a new table. Since 
the volume of products is constant, through dividing the new value of total inputs 
for all products by the corresponding value in the previous table, a price index for 
all products is obtained.  
Multiplying these indices by the related rows in the most recent table, the 
third table results with a new volume for intermediate consumption. The adjustment  
 
 
 
 
 
http://www.upo.es/econ 
  7 
can  be  done  through  dividing  the  products  value  of  the  third  table  by  the 
corresponding ones in the previous table. This process needs to be continued until 
the prices indices at this stage for all products come close enough to 1. Finally, 
through  dividing  the  value  of  inputs  for  all  products  in  the  latest  table  by  the 
corresponding value of inputs in the initial table, the price indices for all products 
will be calculated.  
It should also be mentioned that, since indirect taxes can change according to 
the value of products, it is adjusted with respect to the new value of products. To 
this end, the indirect taxes concern to any products is adjusted with respect to the 
value  of  products  in  any  iteration  of  intermediate  consumption  adjustment 
simultaneously. Thus, the products values are adjusted with respect to intermediate 
consumption and indirect taxes in any iteration.  
To formulate this procedure, let Iit denote the price index for products i in the 
t
th iteration of the adjustment. Thus the k
th iteration of the process of adjusting the 
tables can be expressed as follows: 
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
=
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
´
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
= ´ =
- - -
- - -
- - -
-
k
nm
k
n
k
n
k
m
k k
k
m
k k
k
nm
k
n
k
n
k
m
k k
k
m
k k
k
n
k
k
k k K
T T T
T T T
T T T
T T T
T T T
T T T
I
I
I
T I T
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
￿
2 1
2 22 21
1 12 11
1 1
2
1
1
1
2
1
22
1
21
1
1
1
12
1
11
2
1
1
0 0
0 0
0 0
  (3) 
  
 
 
 
 
 
http://www.upo.es/econ 
  8 
where T
k and T
k-1 refer to the k and k-1
th iterations of the adjusted tables including 
the intermediate and final consumption parts of the I-O tables, respectively. I
k stands 
for a diagonal matrix of prices indices in the k
th iteration of the table adjustment 
process.  
  Thus, 
t T , the final adjusted table, can be defined as: 
 
0 3 2 1 T I I I I T
t t ´ ´ ´ ´ ´ = ￿   (4) 
 
where I
1 to I
t refer to the diagonal matrices of prices indices in different stages of the 
adjustment process and T
0 indicates the intermediate and final consumption parts of 
the initial I-O table. 
  Hence,  Ii,  the  price  index  of  products  i,  can  be  calculated  through  the 
following relation:  
 
t
i i i i
t
i
t
k
i I I I I I I ´ ´ ´ ´ = =P
=
￿
3 2 1
1
  (5) 
 
  According to the indirect tax rule in Iran
4, indirect taxes are computed based 
on the products value. The indirect tax on products can thus be adjusted through the 
relation (6):    
                                                 
4 The taxes integration rule (1381), The Country Tax Affairs Organization: 
http://www.storg.ir/laws/tajmi_avarez.htm. 
  
 
 
 
 
 
http://www.upo.es/econ 
  9 
 
1
1 1 1 1 ) (
-
- - - - - + +
- + +
=
k
j k
j
k
j
k
j
k
j
k
j
k
j
k
j
k
j k
j Ta
Su S W X
Suj S W X
Ta   (6) 
 
k
j
k
j Su Ta , , 
k
j
k
j
k
j S W X & ,   respectively  denote  indirect  taxes,  subsidy,  total 
intermediate consumption, wages and the operation surplus for products j in the k
th 
iteration of the table adjustment process. 
1 1,
- - k
j
k
j Su T , 
1 1 1 & ,
- - - k
j
k
j
k
j S W X  refer to the 
same items for products j in the 
th k ) 1 ( -  iteration of the table adjustment process, as 
well respectively.  
  Finally, using Laspeyres price index procedure, it is possible to examine the 
PPI as a result of any increment in the price of products, as follows: 
   
￿
￿
￿
￿
=
=
=
= =
´
´
= n
i
i
n
i
i
n
i
i i
n
i
i i
Z
Z
P Q
P Q
PPI
1
0
1
1
0 0
1
0
  (7) 
0 0, i i P Q  and 
0
i Z respectively refer to the quantity, the price level and the level of the 
total products value for products i
th before any increment in the prices happened, 
whereas i P and  i Z denote, also respectively, the level of the price index and the 
size of the total products value for products i
th after the increment in the price took 
place. 
 
                                                                                                                                         
  
 
 
 
 
 
http://www.upo.es/econ 
  10 
III. Empirical Results 
  
The proposed model was applied to examine the effect of a 25% increment in the 
motor  spirit  price  on  the  products  prices  indices  and  the  PPI.  The  calculated 
symmetric  147  products  to  147  products  I-O  table,  was  adjusted  through  33 
iterations. In order for it to be useful, 28 products included in the Central Product 
Classification (CPC) were aggregated to the adjusted table analyzed in this paper 
(see Table (1)).  
  According to calculation results, a 25% increment in the motor spirit price 
leads to an increase in the prices indices of all products. The cost-push impact of 
this  increment  on  all  of  these  products  indices  is  less  than  one  percent.  The 
maximum impact, which is on transportation services, has been estimated to be of 
about 0.7492% on the price index of this service.      
  In addition, the outcome of the calculation shows that any increment in the 
motor  spirit  price  has  the  most  impact  on  transportation,  fish  and  other  fishing 
products, and forestry and logging products prices indices, respectively. In contrast, 
the results reveal as well that the price indices of crude petroleum and natural gas, 
gardening products and other personal services are the least affected by the motor 
spirit price increment.  
  The last row of Table (1) displays the impact of a 25% increment in the 
motor  spirit  price  on  the  PPI  of  the  economy.  The  results  of  the  research 
demonstrate that the cost-push impact of that increment on the PPI is estimated at  
 
 
 
 
 
http://www.upo.es/econ 
  11 
0.2540%, about one percent the size of the increase in the motor spirit price. Thus, it 
seems  the  cost-push  impact  of  the  increase  in  the  price  of  motor  spirit  is 
inconsiderable.    
 
IV. Conclusion 
The cost-push impact of an increase in the motor spirit price on products indices and 
inflation was studied in this paper. Procedures were reviewed. I-O table adjustment 
procedure was developed to examine the impact of an increase in the motor spirit 
price on products indices and inflation. 
  The results of the research demonstrate that the cost-push influence of an 
increase in the price of motor spirit on products prices indices is inconsiderable. So 
the maximum value of the resulted increments in response to a 25% increase in the 
motor spirit price does not exceed 0.7492%. In addition, the cost-push inflation rate 
is estimated at about one percent of the motor spirit price increment. Thus, despite 
the huge amount of subsidies annually spent on the motor spirit price to prevent 
inflation, increments on that price have inconsiderable effects.  
   
References 
Bazzazan, F. and Batey, P. W. J. (2003) The development and empirical testing of 
extended input-output price models, Economic Systems Research, 15, 69-86.  
 
 
 
 
 
http://www.upo.es/econ 
  12 
Cansino, J. M., Cardenete M. A. and Roman, R. (2007) Regional evaluation of tax 
on the retail sales of certain fuel through a social accounting matrix, Applied 
Economics Letters, Forthcoming.  
Cardenete, M. A. and Sancho, F. (2002) The price effects of indirect taxation in the 
regional economy of Andalusia, Journal of Applied Input-Output Analysis, 8, 
1-13. 
Chaudhuri,  K.  (2001)  Long-run  prices  of  primary  commodities  and  oil  prices, 
Applied Economics, 33, 531-538. 
Cunado J., Gracia, F. P. (2003) Do oil price shocks matter? Evidence for some 
European countries, Energy Economics, 25, 137–154. 
 
Dorrodian,  K.  and  Boyd,  R.  (2003)  The  linkage  between  oil  price  shocks  and 
economic growth with inflation in the presence of technological advances: a 
CGE model, Energy Policy, 31, 989-1006. 
Driffield, N., Ioannidis, C. and  Peel D. A. (2003) Some Further Empirical Evidence 
on the Impact of Oil Price Changes on Petrol Prices, International Journal of 
the Economics of Business, 10, 195-203. 
Molina, J. A. (2004) Analysing the effects of price changes on the cost of living of 
consumers using true indices, Applied Economics Letters, 5, 639- 644. 
Roeger, W. (2005) International oil price changes: impact of oil prices on growth 
and inflation in the EU/OECD, International Economics and Economic Policy, 
2, 15–32. 

Analysing the effects of price changes on the cost of living of consumers using true indices,

Do oil price shocks matter? Evidence for some European countries,

International oil price changes: impact of oil prices on growth and inflation

Long-run prices of primary commodities and oil prices,

Some Further Empirical Evidence on the Impact of Oil Price Changes on Petrol Prices,

The development and empirical testing of extended input-output price models,

The linkage between oil price shocks and economic growth with inflation in the presence of technological advances: a CGE model,

The price effects of indirect taxation in the regional economy of Andalusia,

Cost-push impact of motor spirit price on price indices and inflation

http://www.upo.es/serv/bib/wps/econ0711.pdf

Cost-push impact of motor spirit price on price indices and inflation

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics