Moreover, commodity prices are set in world markets, whereas manufactured goods are subject to product differentiation and to a greater degree of pricesetting influence by firms. In ToTEM, the key driver of consumer prices is the marginal cost of producing consumer goods. Consumer goods are produced using four inputs: labour, capital, an imported intermediate good, and commodities.
In this framework, the marginal cost can be expressed as a function of labour costs (including the costs of hiring and training), as well as the price of imported intermediate goods, the price of commodity inputs, the price of investment goods, and the rate of capacity utilization.