The use of a fixed-weight interarea price index avoids the difficult problems of specifying differing regional market baskets, but many formidable definitional and measurement issues remain. One conceptual issue concerns the specification of the market basket for the purpose of adjusting the poverty thresholds: whether to use a basket with items and weights based on the expenditure patterns of typical families, as is done for the Consumer Price Index, or a basket that reflects the spending patterns of families at lower expenditure levels. We believe that a reasonable approach would link the market basket to spending patterns of families with expenditures somewhat below the median.

If one assumes that an appropriate market basket is specified, the next set of problems concerns data and measurement. In order to have an adequate fixed-weight interarea price index, the sample of prices must be large enough in each area for reliable estimation, and consistent definitions must be applied for all of the items that are priced (e.g., the same type and quality of new car or winter coat must be priced in the same type of sales outlet in each area).

Research Findings on Price Differences

Given all of the difficulties noted above, one might be tempted to give up on the task of developing an interarea price index for use in adjusting the poverty thresholds. Arguing for a continued effort to develop a reasonable approach is the evidence we have—admittedly imperfect—of important price differentials across areas.

As of fall 1981, the last year for which BLS published the family budgets, the relative cost of the lower consumption budget for a family of four, for urban areas in the 48 contiguous states, varied from about 113 percent of the national average in the San Francisco-Oakland and Seattle-Everett metropolitan areas to 91 percent of the average in nonmetropolitan urban areas of the South (Bureau of Labor Statistics, 1982: Table 4).8 In general, relative costs were higher in metropolitan than in nonmetropolitan areas and in the West and Northeast than in the South.

As noted above, a problem with the BLS interarea price index for the Family Budgets Program is that it reflected varying market baskets across regions. Sherwood (1975: Table 1) compared the BLS index with a fixed-weight interarea index for the intermediate (or "standard") budget for fall 1973. He found the same general patterns; however, the relative cost of the standard budget in the South was not quite as low or that in the Northeast quite as high with the fixed-weight index as with the BLS index.

BLS has continued to publish consumer price indexes for regions, popu-

8  

Relative costs in Alaska and Hawaii were 146 and 126 percent, respectively, of the national average.



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