Research Description

Optimally Finding Market Baskets to Accurately Measure Price Levels Across Space

My research project aims to accurately measure variation in the price level across space. In order to do that, I will divide goods and services in two categories: transportable and non-transportable. Then, I will derive an optimal sample size of goods and services prices in relation to the cost of measuring it weights of an item in consumer budget variance and project budget. In order to maximize accuracy, given a limited time and project budget, larger samples of prices will be collect for items that: are less costly to collected the data than another item represent bigger fraction of consumer budget and varies more across cities. Since arbitrage is possible, theory suggests that prices of transportable goods are the same everywhere, given that if prices were lower in a certain city, for example, people would buy goods in this city and sell them in another city for a profit. It implies that spending resources measuring prices variance of transportable goods, with a given project budget, means that less resources will be spent on measuring the prices of items that considerably vary across cities. I will arrive at two price level indices. One calculated on all prices, and the other built under the assumption that transportable goods cost the same everywhere (which means that only prices of non-transportable goods will be taken into account). Maintaining the hypothesis that wage levels adjust for the actual discrepancy in price levels across cities, I will test the ideas abovementioned by regressing wages on the 2 price level indices obtained.