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A Spatial cost of living index for Colombia using a microeconomic approach and censored data

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Author Info

  • Laura Atuesta

    ()
    (Regional Economics Applied Laboratory, University of Illinois - Estados Unidos)

  • Dusan Paredes

    ()
    (IDEAR - Department of Economics, Universidad Católica del Norte - Chile)

Abstract

This paper describes a methodology to calculate a spatial cost of living index using Colombian data for 2006 that takes into consideration the microeconomic behavior of households. Using the Almost Ideal Demand System and recovering the expenditure functions for the 23 main Colombian cities, the index proposed is compared to the traditional methodologies used to calculate the regional basket of goods in the country and to an alternative methodology proposed by Romero (2005). This comparison suggests that when the substitution effects are not considered, and the same basket of goods is evaluated in every city, the index is biased, and this bias increases when the difference between cities increases. For reducing the bias, we use a microeconomic approach that keeps the households' level of utility constant and allows substitution among different baskets of goods. According to our calculations, Bogota is still the most expensive city in the country followed by Armenia, Cali, Bucaramanga and Ibague.

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File URL: https://sites.google.com/a/ucn.cl/wpeconomia/archivos/WP2011-04.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Universidad Catolica del Norte, Chile, Department of Economics in its series Documentos de Trabajo en Economia y Ciencia Regional with number 14.

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Length: 26 pages
Date of creation: May 2011
Date of revision: May 2011
Handle: RePEc:cat:dtecon:dt201104

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Keywords: Spatial cost of living index; Almost Ideal Demand System;

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  1. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 7-30.
  2. Russel J. Cooper & Keith R. McLaren, 1992. "An Empirically Oriented Demand System with Improved Regularity Properties," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 652-68, August.
  3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  4. Darwin Cortes & Jorge Perez, 2010. "El Consumo de los Hogares Colombianos, 2006-2007: Estimación de Sistemas de Demanda," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  5. Ray, Ranjan, 1983. "Measuring the costs of children : An alternative approach," Journal of Public Economics, Elsevier, vol. 22(1), pages 89-102, October.
  6. Heien, Dale & Wessells, Cathy Roheim, 1990. "Demand Systems Estimation with Microdata: A Censored Regression Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 365-71, July.
  7. Jahyeong Koo & Keith Phillips & Fiona Sigalla, 1997. "Measuring regional cost of living," Working Papers 9713, Federal Reserve Bank of Dallas.
  8. Keen, Michael, 1986. "Zero Expenditures and the Estimation of Engel Curves," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(3), pages 277-86, July.
  9. Kokoski, Mary F, 1987. "Problems in the Measurement of Consumer Cost-of-Living Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(1), pages 39-46, January.
  10. Federico Perali & Jean-Paul Chavas, 2000. "Estimation of Censored Demand Equations from Large Cross-Section Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 1022-1037.
  11. Braithwait, Steven D, 1980. "The Substitution Bias of the Laspeyres Price Index: An Analysis Using Estimated Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(1), pages 64-77, March.
  12. Dusan Paredes & Patricio Aroca, 2008. "Metodología para Estimar un Indice Regional de Costo de Vivienda en Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(131), pages 129-143.
  13. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
  14. Dusan Paredes, 2011. "A methodology to compute regional housing price index using matching estimator methods," The Annals of Regional Science, Springer, vol. 46(1), pages 139-157, February.
  15. Reinhold Kosfeld & Hans-Friedrich Eckey & Matthias Türck, 2005. "New Economic Geography and Regional Price Level," Discussion Papers in Economics 78/05, University of Kassel, Institute of Economics.
  16. J. Scott Shonkwiler & Steven T. Yen, 1999. "Two-Step Estimation of a Censored System of Equations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 972-982.
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