Heterogeneity in prices and cost of living within a country: New evidence on the north-south divide in Italy

This paper proposes a methodology for tackling the absence of data on spatial prices required to calculate regional price differentials. Another motivation is to extend the traditional True Cost of Living Index incorpo- rating regional differences in the quality of services. The application of the proposed methodology to Italy provides new evidence of a sharp North-South divide in living standards. The current practice of calculating a country wide price index overlooking intra country differences in the purchasing power of its currency can bias studies ranging from inequality and poverty to comparing real growth rates and costs of living between coun- tries. Differences in relative poverty between the North and the South of Italy almost disappear once spatial prices are incorporated. The overall message is that comparisons of living standards within and between countries must incorporate spatial differences in prices, wages, employment opportunities, and in the quality of essential services.