Document Type

Working Paper

Publication Date



Regional Research Institute

Document Number



Regional Research Institute


Many economists recognize the importance of accounting for retail price variation when comparing standards of living between geographic areas. Such indexes are used to allocate education funds, for calculating income transfers, and in relocation decisions. Currently, public policy shows a trend toward giving states more control over the distribution of federal monies through block grant programs. However, many states do not have a system for measuring price variations and use the US CPI or an index for a major city within their state to estimate cost of living variation within a state. They do not account for the tastes and preferences of population groups of the state nor do they account for local market baskets. Rural areas, in particular, are always excluded from these measures. So that, a major task facing economists, especially those in predominantly rural states, is how to calculate geographic price differences within a state accurately. This paper will address issues economists confront in attempting to put together such indices. It contains a discussion and examination of the opportunities and pitfalls involved with special emphasis on theory, implementation, and reality.