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July 1991, Vol. 114, No. 7
Interarea differences in consumer prices
Mary F. Kokoski
Interarea comparisons of the cost of living are of interest to researchers and policymakers, as well as to businesses and households making decisions about where they should locate or relocate. It is widely perceived that the cost of goods and services differs across geographic areas. Published Consumer Price Index (CPI) series for various geographic areas measure price changes over time for these areas. An official, consistently designed index of interarea price differences does not exist. Research is under way, however, to investigate the possibility of using the enormous data resources compiled for the CPI to construct a comprehensive index of interarea prices. Such an index, if officially produced, would provide an interarea complement to the CPI.
Among the goods and services included in this experimental index would be those composing the food-at-home component of the consumer's budget. Food at home, which constituted 10.1 percent of the average household budget in December 1989, is also an expenditure of particular interest to policymakers and researchers in the health field. Accordingly, in this article, an experimental interarea price index for food at home is analyzed in the context of past research at the Bureau of Labor Statistics on geographic differences in prices.
Interarea price measurement
The first official measure of interarea differences in the cost of living was the standard budget of the Family Budgets program of the BLS, developed in the 1940's. Under this program, a predetermined standard of living was translated into a set of hypothetical baskets of goods and services, and the costs of these baskets were compared across geographic areas. The standard budget embodied an "income requirements approach," by assuming that families with a given demographic profile had the same utility function across goods and services, leisure, and working conditions.1 It did not, however, take an identical basket of goods and services as a common denominator to compare in all areas. Variations in the specific items included, as well as in the quantities purchased, were therefore implicit in the interarea comparison. As Mark Sherwood pointed out in 1975, an interarea price index produced from these budget data would serve as a measure of differences in the cost of living only under the assumption that a given family would be indifferent with respect to all the various baskets.2 By comparing index values from the Family Budgets program with those generated by a fixed market basket for all areas, he found that variations in specification of items and in quantities did have a large effect on the interarea comparisons for food and transportation.3
This excerpt is from an article published in the July 1991 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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1 Mark K. Sherwood, "Family budgets and geographic differences in price levels," Monthly Labor Review, April 1975, pp. 8-15.
2 Sherwood, "Family budgets,"p. 9.
3 Ibid., p. 8.
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