| Abstract: |
The large literature on regional inequality in China is hampered by incomplete
evidence on price dispersion across space, making it hard to distinguish real
and nominal inequality. The two main methods used to calculate spatial
deflators have been to price a national basket of goods and services across
China’s different regions or else to estimate a food Engel curve and define
the deflator as that needed for nominally similar households to have the same
food budget shares in all regions. Neither approach is convincing with the
data available in China. Moreover, a focus on tradable goods like food may be
misplaced because of the emerging literature on the rapid convergence of
traded goods prices within China that contrasts with earlier claims of
fragmented internal markets. In a setting where traded goods prices converge
rapidly, the main source of price dispersion across space should come from
non-traded items, and especially from housing given the fixity of land. In
this paper we use newly available data on dwelling sales in urban China to
develop spatially-disaggregated indices of house prices, which are then used
as spatial deflators for both provinces and core urban districts. These new
deflators complement existing approaches that have relied more on traded goods
prices, and are used to re-examine the evidence on the level of regional
inequality. Around one-quarter of the apparent spatial inequality disappears
once account is taken of cost-of-living differences. |