Multi sectors and pricing

Dear everybody,

I have a model with different sectors (perfect competition) that produce not necesseraly from the same inputs. Some produce only from capital and labor, and others from capital, labor and energy.

In that case, can I still fix all of my good prices, produced from different sectors, to be equal to 1 ?

If input prices (perfect markets) move, then the response of the aggregate price might be different from one sector to another and I wont be able to catch that if I just fix all prices equal to 1.

Thank you

No, it seems in this case the normalization may not be feasible due to different cost structures that need to be taken into account.

Thank you @jpfeifer . So can I assume for the firms that have the same inputs in their production processes that their price is equal to 1, but for other firms I would make their price endogenous ?

Without having worked through the model, it is impossible to tell. But I doubt there is a rationale for the type of normalization in part of the model.

1 Like