Sub-National PPPs Based on House and Real Income Disparity across China: a Distinctive Spatial Deflator

Comparisons of real income within a country generally imply a deflation for relative price differences across regions. Housing services are the main source of spatial price difference because of the fixity of land supply. This paper argues that housing prices can synthetically reflect the general price level and proposes to estimate the subnational purchasing power parities (PPPs) based on the housing market as a distinctive spatial deflator to measure real income disparity. With a sample of urban and rural regions ranging from 1999 to 2015, house price relatives are estimated with the country-product-dummy (CPD) method; then, the subnational PPPs are calculated with the classic Gini-Eltetö-Köves-Szulc (GEKS) method. The results show that the subnational PPPs in the east regions are always high, while those in the middle and west regions are usually low for both urban and rural areas. The values of subnational PPPs for different regions change over time, while the trends are inconsistent between the east regions and the middle and west regions. Taking the subnational PPPs as a new distinctive spatial deflator, provincial income disparity exhibits an obvious descending trend. Notably, income disparity decreased significantly after deflating, for both urban and rural regions.