Application of the country product dummy method to construct spatial and temporal price indices for Sri Lanka

Inadequate geographic coverage, inadequate population coverage, and short length of series make existing Sri Lankan price indices less than optimal to measure long-term trends inequality and poverty. Since they are based on binary methodologies they also do not satisfy the property of transitivity. In contrast, the multilateral Country Product Dummy (CPD) method satisfies the axiom of transitivity and ensures base region invariance. This paper applies the CPD method to construct spatial and temporal price indices that can be used for inequality and poverty analysis in Sri Lanka. It uses expenditure data from the Labor Force and Socio-Economic Surveys (LFSS) of 1980/81 and 1985/86 and the Household Income and Expenditure Surveys (HIES) of 1990/91, 1995/96, 2002, 2006/07 and 2009/10 conducted by the Department of Census and Statistics, Sri Lanka, to construct the indices. The former conflict-affected regions are excluded due to lack of data. The study reveals some recently emerging differences in rural and urban prices that are significant and cause for concern. These differences merit careful investigation to find out underlying factors using more appropriate and extensive data.