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Cost of living differences between urban and rural areas in Indonesia

Author

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  • 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.

Suggested Citation

  • Ravallion, Martin & van de Walle, Dominique, 1989. "Cost of living differences between urban and rural areas in Indonesia," Policy Research Working Paper Series 341, The World Bank.
  • Handle: RePEc:wbk:wbrwps:341
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    References listed on IDEAS

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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. Ravallion, Martin & Chao, Kalvin, 1989. "Targeted policies for poverty alleviation under imperfect information: Algorithms and applications," Journal of Policy Modeling, Elsevier, vol. 11(2), pages 213-224.
    3. 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 720-744, August.
    4. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
    5. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, April.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Muellbauer, John, 1974. "Prices and Inequality: The United Kingdom Experience," Economic Journal, Royal Economic Society, vol. 84(333), pages 32-55, March.
    11. 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.
    12. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
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    Citations

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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.
    2. Giovanni D'Alessio, 2017. "Well-being, the socio-economic context and price differences: the North-South gap," Questioni di Economia e Finanza (Occasional Papers) 385, Bank of Italy, Economic Research and International Relations Area.

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