By A. J. Hagger (auth.)

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The testable predictions generated by a model can take various forms. The values of the unknowns which are generated by the model over any specified period, on the basis of the values observed for the data over that time period, constitute one obvious form of 22 Inflation: Theory and Policy testable prediction. P. per man-hour and the unemployment percentage as data. By obtaining observations on the two data variables for each quarter from first quarter 1956-7 to fourth quarter 1965-6, say, and sub stituting these into the model, values of the rate of inflation and the rate of increase of money wages per man-hour could be generated for each of the forty quarters in question.

Another index which would be appropriate, and which has sometimes been used in mark-up models, is an index of manufacturing prices. All mark-up models take the mark-up process as their starting-point. Thus the framer of a mark-up model sees price as being determined in the following way: price = unit cost + (x x unit cost) = (1 + x) x unit cost, where x is some fraction such as 1/10 or 1/4 or 3/10. The term (x x unit cost) is the profit margin; clearly it is equal to price minus unit cost. t Alternatively, lOOx is tFrom the above expression we have: price - unit cost = x x unit cost Therefore, x= price - unit cost unit cost Inflation: Theory and Policy 28 called the percentage profit margin since it is the profit margin expressed as a percentage of unit cost.

83. 83. 88. 1) relates, of course, to a single price-maker, for example a single manufacturing firm or a single retailer. 2) where p denotes the percentage increase, between the current quarter and the previous quarter, in some index of mark-up prices, m the percentage increase in some index of mark-up factors and c the percentage increase in some index of unit cost in the mark-up sector. We next note that the variable c can be decomposed in various ways. t tDenote the unit cost of a price-maker by C, the unit labour cost by N and the unit non-labour cost by S.