Calculating Rural-Urban Food Price Differentials from Unit Values in Household Expenditure Surveys: A Comparison with Existing Methods and A New Procedure

While purchasing power parity (PPP) between countries has received a great deal of attention, PPP calculations within countries have received less attention. The idea that one unit of currency has the same purchasing power in all regions in large countries is false. This paper addresses this limitation by proposing a methodology for calculating rural-urban PPP in India. The paper introduces a concept of item-specific PPP that exploits the analogy with an item-specific equivalence scale. The methodology relies on demographically-varying preferences to estimate PPP. The results underline the need to incorporate spatial differences in PPP calculations in countries with heterogeneous preferences. Copyright 2012, Oxford University Press.