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SPATIAL COMPARISONS OF PRICES AND EXPENDITURE IN A HETEROGENEOUS COUNTRY: METHODOLOGY WITH APPLICATION TO INDIA

Published online by Cambridge University Press:  31 January 2014

Amita Majumder ,
Ranjan Ray  and
Kompal Sinha
Amita Majumder
Affiliation:
Indian Statistical Institute
Ranjan Ray*
Affiliation:
Monash University
Kompal Sinha
Affiliation:
Monash University
*
Address correspondence to: Ranjan Ray, Room E 863, Building 11, Department of Economics, Monash University, Clayton, Victoria 3800, Australia; e-mail: [email protected].
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Abstract

This study addresses two significant limitations in the literature on cross-country expenditure comparisons: (a) treatment of all countries, large and small, as single entities with no spatial differences inside the countries, and (b) use of Divisia price indices, rather than Rank 3 preference-based “exact price” indices, in the expenditure comparisons. This paper compares alternative preference consistent methods for estimating spatial price differences in a large heterogeneous country, namely India, that are benchmarked against the spatial prices generated by the Laspyeres and Tornqvist price indices. Unlike the use of conventional price indices, the use of demand-systems-based methods allows the incorporation of price-induced substitution effects between items. The paper illustrates the usefulness of the methodology by using the “exact” spatial price indices, in conjunction with the inequality-sensitive welfare measure due to Sen, to rank the Indian states and examine changes in ranking during one of the most significant periods in independent India. The results have methodological and empirical implications that extend far beyond India.

Keywords

True Cost of Living IndexInequality-Sensitive Real Expenditure ComparisonsSpatial Price IndicesHasse DiagramsUnit Values
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 5 , July 2015 , pp. 931 - 989
Copyright
Copyright © Cambridge University Press 2014 

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