Determinants of Spatial Variations in the Cost of Living
It has long been recognized that there are large and persistent spatial differences in the cost of living. In spite of this, however, it has remained common for researchers and analysts to assume that prices vary longitudinally but not cross-sectionally, and to ignore spatial variation in the cost of living. In order to know when such an assumption is justifiable and when it is likely to do significant harm to the analysis, we must understand the determinants of spatial variations in the cost of living. This paper discusses the factors which are likely to cause such variations and reports the results of an empirical investigation of their relative strengths. The empirical analysis is based upon the Bureau of Labor Statistics' data on Urban Family Budgets. The model is estimated on a pooled time series/cross-sectional sample constructed from data on thirty-eight metropolitan areas over the period from 1969 to 1977. Much of the cross-sectional variation in the cost of living is explained by differences in climate. Metropolitan areas with cold winters have a higher cost of living than comparable areas located in warmer climates.
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