Cost of Living Worldwide | Global Finance

The OECD defines a cost of living index (COLI) as an index that measures the change in the minimum expenditures that would be incurred by a utility-maximizing consumer, whose preferences or tastes remain unchanged, in order to maintaining a given level of utility (or standard of living or welfare).

Cost of living indices are often used in employment contracts, pension benefits, and government entitlements—such as employment benefits—to make adjustments for time and geographic location on expenditures.

A cost of living allowance (COLA) is used by employers to adjust salaries—generally on an annual basis—based on changes in a cost-of-living index. Cost of living calculations are also used to compare the cost of maintaining a certain standard of living in different geographic areas, and a cost-of-living index is often used by employers in adjusting salaries for international assignments. Geographic differences in cost of living can be measured in terms of purchasing power parity.

Difference between Cost of Living and Consumer Price Index

The International Labour Organization (ILO) defines a consumer price index (CPI) as an index constructed to measure changes over time in the general prices of consumer goods and services. A CPI may be used to measure the effects of price changes on the cost of maintaining one’s standard of living.

Although the two are often used interchangeably and a CPI is often used in cost of living calculations, there is a basic difference between a CPI and a COLI: the CPI simply measures changes in the pricing of a basket of goods and services over time or location while a COLI takes into account how external forces—such as the effect of changing income tax rates on after-tax income—affect the minimum expenditure in maintaining a certain standard of living.

Mercer 2010 Worldwide Cost Of Living Survey

One of the most recognized cost of living indexes is produced by global HR advisory firm Mercer. The Mercer 2010 Cost of Living Survey evaluated 214 cities worldwide across five continents and evaluated a range of goods and services, including housing, transport, food, clothing, household goods and entertainment. The survey also measures currency movements against the US dollar. It uses New York City as a baseline in ranking cities.

The top 10 most expensive cities in which to live, according to the Mercer survey, are all located in Africa, Asia and Europe. Luanda, in Angola, comes in at number one, followed by Tokyo, Japan; N’Djamena, Chad; Moscow, Russia; Geneva, Switzerland; and Osaka, Japan. The index looks at the cost of maintaining a certain standard of living. If it takes all of a given person’s income to maintain a particular standard of living in one country, but only 75% of a given person’s income to maintain a certain standard of living in another country, the survey will place the first country higher on the ranking than the second. This is one of the reasons that a number of African countries rank so high – it measures the cost of goods and services versus income of citizens.

Tirana, Albania, and Skopje, Macedonia are the least expensive places to live in Europe. At the bottom of the ranking in Africa are Windhoek, Namibia and Gaborone, Botswana. In Asia Pacific the least expensive cities are Islamabad and Karachi in Pakistan.

In South America, the most expensive cities are Sao Paulo and Rio de Janeiro, Brazil—ranked 21^st and 29^th, respectively. La Paz, Bolivia and Asuncion in Paraguay were the least expensive cities in South America.

Topping the list in North America are New York City—ranked 27^th, Havana, Cuba—ranked 45^th, and Los Angeles—ranked 55th. The most expensive city in Canada is Vancouver at 75 in the rankings, and in Mexico the top-ranked city is Mexico City at 166^th.  Monterrey, Mexico comes in at the bottom of the ranking for North America.

In the Middle East it is Tel Aviv that tops the ranking, at 19, and Tripoli in Libya comes in as least expensive.

The financial crisis of 2007-2009 saw housing prices drop in many global locations—and in particular in the USA. As this is a critical factor in overall cost of living figures, the 2010 index saw figures drop in some locations, such as major US cities.

Since global cost of living figures are also affected by exchange rate fluctuations, the volatility in FX markets over the course of the crisis and coming out of the economic downturn have had an impact on survey results.

Sources