Application of the country product dummy method to construct spatial and temporal price indices for Sri Lanka

Ramani Gunatilaka,Charith Abeyratne

doi:10.4038/sljer.v2i1.97

Abstract

Inadequate geographic coverage, inadequate population coverage, and short length of series make existing Sri Lankan price indices less than optimal to measure long-term trends inequality and poverty. Since they are based on binary methodologies they also do not satisfy the property of transitivity. In contrast, the multilateral Country Product Dummy (CPD) method satisfies the axiom of transitivity and ensures base region invariance. This paper applies the CPD method to construct spatial and temporal price indices that can be used for inequality and poverty analysis in Sri Lanka. It uses expenditure data from the Labor Force and Socio-Economic Surveys (LFSS) of 1980/81 and 1985/86 and the Household Income and Expenditure Surveys (HIES) of 1990/91, 1995/96, 2002, 2006/07 and 2009/10 conducted by the Department of Census and Statistics, Sri Lanka, to construct the indices. The former conflict-affected regions are excluded due to lack of data. The study reveals some recently emerging differences in rural and urban prices that are significant and cause for concern. These differences merit careful investigation to find out underlying factors using more appropriate and extensive data.

Highlights

This paper applies the Country Product Dummy method to construct spatial and temporal price indices that can be used for inequality and poverty analysis in Sri Lanka over the period 1980-2010.The former conflict-affected regions are excluded from the analysis due to lack of data from these regions for most of this period
The standard Country Product Dummy (CPD) formulation regresses the logarithm of observed prices on two sets of dummy variables, one relating to the various regions and the other to the various commodities
The empirical research revealed some recently emerging differences in rural and urban prices that are significant and cause for concern. These differences merit careful investigation to find out underlying factors, using more appropriate and extensive data

Summary

Introduction

This paper applies the Country Product Dummy method to construct spatial and temporal price indices that can be used for inequality and poverty analysis in Sri Lanka over the period 1980-2010.The former conflict-affected regions are excluded from the analysis due to lack of data from these regions for most of this period.There are several reasons why currently available indices are not appropriate for the purpose of inequality measurement. Almost all existing price indices (indices constructed and used by Department of Census and Statistics, 2004, Datt and Gunewardena, 1997, Gunewardena, 2007)have been computed for the specific purpose of measuring poverty, and use the consumption patterns of 40 per cent of households with the lowest consumption expenditure to construct the price indices. As a result, these price indices are not appropriate for the purpose of measuring inequality. This means that the set of price comparisons that the binary methodologies yield are not inherently internally consistent between all possible direct and indirect comparisons(Kravis et al, 1982)

Methods

Results

Conclusion