Inter-city Variation in Prices

In this paper we have constructed a relative cost of living index for 32 cities/towns of Pakistan using latest available prices to understand the extent of current differences in cost of living across cities and also to compare changes in relative cost of living since 1999 [Pasha and Pasha (2002)]. The index values reveal significant differences in cost of living across Pakistan and especially across provinces with prices significantly higher in Balochistan (overall) and NWFP (for wheat). When regressed against various explanatory variables, the variation in cost of living appears to be determined by the population in cubic form (reaching a minimum for a city size of 2.1 million) and the provincial affiliation of cities. The index also reveals that relative to 1999, the economy as a whole appears to have become less integrated as the difference in prices across cities is much greater than in 1999. However, cities in Sindh due to their close proximity to the port have become less expensive because of the increased share of imports in consumption. The findings of this paper have very important implications for public policy with respect to transfer payments to relieve poverty, urban development, inter-provincial trade and transport and allocation of development funds among provinces.