Spatial Variation in Prices and Expenditure Inequalities in Australia

This paper extends the recent literature on spatial price differences within a country to provide evidence on the Australian experience during the past two decades. While much of the existing evidence on spatial price variation within a country relates to large heterogeneous countries such as Brazil, India and Indonesia, Australia has not figured so far in this literature, because it is presumed to be homogeneous in all relevant respects. However, a series of unrelated events that affected the states and territories differently, such as the mining boom and the recent global financial crisis, has made Australia much more heterogeneous than is commonly assumed. The contribution of this study is both methodological and empirical. The paper proposes a method of calculating preference based intra country spatial price indices that measure the extent of price variation between regions in a given time period. It shows how the traditional concept of the ‘true cost of living index’, or the ‘exact price index’ as it is more commonly known, that is used in temporal price comparisons, can also be used in spatial price comparisons. The study also shows how the distributive impact of price changes can be evaluated over time. The Australian experience shows that the price movement has been regressive in all states. The empirical evidence on Australia is based on the extension of the recent EASI demand system that allows a more general form of preferences than has been considered previously. The results show that during the past two decades spatial price variation has increased steadily, with the most recent period (2005-9) witnessing a very large increase. The results also show that the ranking of the states, on both cost of living and inequality, has altered significantly over the past two decades. The results confirm that Australia is no longer the homogeneous country setting that was assumed previously. JEL Classification: C13, D12, D63, E31.