Expenditure-based Interarea Cost of Living Index

The main difficulty in comparing the cost-of-living among metropolitan areas is that, at this level, prices of most goods and services are not available. Even when the prices are available, constructing aggregate prices for groups of goods and services comparable across areas, is a difficult task. In this paper we attempt to construct a cost-of-living index for metropolitan areas, using only data on metropolitan-level expenditures. While our method circumvents the two problems mentioned above, it requires two assumptions regarding the level of utility attained across areas, and the effect of demand elasticity on the relationship pricei‚¾expenditure.