Abstract: This paper presents an incomplete input-output import price transmission model that incorporates the supply-and-demand and monopoly effect, and distinguishes the heterogeneity of processing trade production. The model is used to estimate the transmission effects of rising import prices of electronic components on the price levels of various sectors and price indices in China. The results show that the largest impact of rising import prices is on downstream electronic equipment products, including communication equipment, computers and audio-visual equipment. Non-foreign-funded electronic equipment manufacturers in the domestic market experience an enhanced price transmission effect due to supply shortage. Empirical results based on the model that distinguishes processing trade show that the impact on the general price level is relatively small. Specifically, compared to the benchmark results that do not distinguish processing trade, the impact on the Consumer Price Index and Producer Price Index decreases by 29% and 53%, respectively. In contrast, since a large number of imported electronic components are used in the production of electronic products for processing trade exports, downstream export prices are more sensitive to rising import prices. Compared to the benchmark results, the price transmission effect on the export price index increases by 30%, and the impact will reverberate through the global value chain, affecting other countries.

Key words: input-output model, price transmission, electronic components, processing trade