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Cost of living differences between urban and rural areas in Indonesia

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Author Info

  • Ravallion, Martin
  • van de Walle, Dominique

Abstract

It is commonly assumed that the cost of living is much higher in cities than in the country because housing rents are higher in urban areas and food staples cost more. This assumption has important implications for sectoral comparisons of welfare levels and distributions. The authors suspect that comparisons of housing rent and food prices overstate the cost-of-living differential. For one thing, the quality of dwelling stock is better on the whole in urban areas, reflecting income differences. For another, the urban consumer is able to substitute in favor of other goods and services which do not cost any more in urban areas. This paper finds that the true cost of living in cities is substantially overestimated by conventional methods. This is more pronounced at low incomes, since the marginal cost of utility is larger (relative to expenditures) in urban areas - implying that the relative cost of urban living increases with income. In a neighborhood on the poverty line, the results suggest that an urban-rural cost-of-living difference of about 10 percent is closer to the truth than the values (as high as 66 percent) used in past work on Indonesia.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 341.

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Date of creation: 31 Dec 1989
Date of revision:
Handle: RePEc:wbk:wbrwps:341

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Related research

Keywords: Economic Theory&Research; Environmental Economics&Policies; Housing&Human Habitats; Poverty Lines; National Urban Development Policies&Strategies;

References

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  1. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  2. Malpezzi, Stephen & Mayo, Stephen K, 1987. "The Demand for Housing in Developing Countries: Empirical Estimates from Household Data," Economic Development and Cultural Change, University of Chicago Press, vol. 35(4), pages 687-721, July.
  3. Straszheim, Mahlon R, 1973. "Estimation of the Demand for Urban Housing Services from Household Interview Data," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 1-8, February.
  4. Deaton, Angus S & Muellbauer, John, 1986. "On Measuring Child Costs: With Applications to Poor Countries," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 720-44, August.
  5. Ravallion, Martin, 1989. "The welfare cost of housing standards: Theory with application to Jakarta," Journal of Urban Economics, Elsevier, vol. 26(2), pages 197-211, September.
  6. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
  7. Mayo, Stephen K., 1981. "Theory and estimation in the economics of housing demand," Journal of Urban Economics, Elsevier, vol. 10(1), pages 95-116, July.
  8. 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.
  9. Sen, Amartya, 1979. "The Welfare Basis of Real Income Comparisons: A Survey," Journal of Economic Literature, American Economic Association, vol. 17(1), pages 1-45, March.
  10. Muellbauer, John, 1974. "Prices and Inequality: The United Kingdom Experience," Economic Journal, Royal Economic Society, vol. 84(333), pages 32-55, March.
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Cited by:
  1. Abuzar Asra, 1999. "Urban-Rural Differences in Costs of Living and Their Impact on Poverty Measures," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 35(3), pages 51-69.

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