Differences Between Prices of Goods and Services in China

Given a budget constraint, a family allocates its expenditures among food, clothing, and housing and transportation services based on their respective prices. This study tested for differences between these price components. Data were monthly changes for 1999-2017. Prices contained four components of CPI: Price indices of clothing, food, housing and transportation. Unit root tests include ADF, PP and DF-GLS. Cointegration tests include the Engle-Granger and Johansen tests. Four series variables contained a unit root but not cointegrated. A first-differenced VAR(k=3) was estimated. Major findings are that while housing prices grew by 1%, food prices reduced by -0.47% in two months. While clothing prices grew by 1%, food prices reduced by -0.77% in one month. While transportation prices grew by 1%, food prices reduced by -0.53% in one month. Hence, this paper suggests that an increase in expenditures on clothing, housing and transportation may be made at the cost of food consumption. However, an inconsistency of changes across various prices does not necessarily mean causal links between variables or exogeneity of a given variable.