Yesterday I posted an article on the most expensive cities to live in as an expat, why are these the most expensive cities and which expat cities are cheaper to reside in? Cost of living rankings are released by many different companies on a yearly basis to highlight which locations are the most and least expensive to live in the world. Xpatulator.com releases these rankings once every quarter, keeping up to date with the latest political and economic trends that influence these rankings, as well as the exchange rates that are affected due to these influences.
These rankings measure the comparative cost of living in 780 locations, covering every country worldwide. The cost of living comparison uses local prices for defined quantities of the same goods and services, converted to a single currency. Sources include local service providers in each location, international service providers, official governmental statistics and global agency data. The data is quality assured and manually checked by Xpatulator Analysts. The prices of similar related items have been grouped together into 13 basket groups and the cost of living index calculated for each basket in each location. The 13 basket groups are the result of extensive research of actual spending habits ensuring the cost of living indexes reflect a reality-based international expenditure pattern.
For the quarter starting 1 April to 30 June 2013, Zurich in Switzerland with a cost of living index of just under 137 (New York = 100) is ranked as the overall most expensive city to live in, world-wide, according to Xpatulator.com’s April 2013 international cost of living rankings. While Thimphu in Bhutan with a cost of living index of less than 45 (New York = 100), is ranked the cheapest. Tokyo with a cost of living index of 135 has dropped two places to become the third most expensive place to live, while Geneva moves up from third to become the second most expensive location in the world.
The Balassa–Samuelson effect (“purchasing power parity” or “Penn effect”) is evident in the April 2013 Xpatulator.com global cost of living rankings. The Balassa–Samuelson effect (which was developed independently in 1964 by both Béla Balassa and Paul Samuelson) states that consumer price levels in richer countries are systemically higher than in poorer ones. This is based on the assumption that tradable goods cannot vary greatly in price by location (because buyers can source from the lowest cost location). However most services must be delivered locally (e.g. hairdressing), and many manufactured goods have high transportation costs, which makes purchasing power parity differences (PPP) consistent. The Penn effect is that PPP differences typically occur in alignment: where incomes are high, average price levels are typically high.
The Balassa–Samuelson effect is the theory behind the Salary Purchasing Parity Calculator. The objective of this calculator is to determine how much salary in a host location will give an employee the same purchasing power as they currently have in their home location. Take for instance two American Civil Engineer’s with the same education and experience based in Houston. One is assigned to Zurich (with the highest global cost of living) and the other to Bhutan (with the lowest global cost of living). Based on the cost of living (local prices for the same goods and services) the Salary Purchasing Calculator will determine a far higher salary for the engineer assigned to Zurich, not because of productivity or performance which we assume would be the same, but to equalize their salary purchasing power.
So why are there such large cost of living differences around the world? Why is Switzerland so expensive? Zurich and Geneva are the top two most expensive places in the world. The most obvious reasons are the rents, the high standard of living, and high wages. But why is this the case? There are other factors involved such as restricted competition whereby prices are far higher than the real value of the commodities or services involved. Many trades in Switzerland are protected by corporations or guilds which restrict the number of people allowed to practice their particular trade, and who set high mandatory prices for their services.
Switzerland is fragmented into different cultures and different languages in different geographical areas. In comparison to most countries, people do not like to move and will remain in the same area all their life. Service providers in any given area therefore have small, well-defined mature markets where they know their competitors well. Therefore they tend to set prices high in a relatively “captive” small market. The Swiss economy has traditionally always been organized this way and because many people profit from the system there is resistance to changing to a freer economy. Bargain hunting and price negotiation are not part of Swiss culture. They are accustomed to paying high prices and do not like to question them.
Why is Tokyo no longer the most expensive place in the world? The slight decrease in the relative cost of living in Tokyo (relative to the rest of the world) is not only due to Japanese deflation and the weaker yen but it is also due to rising prices elsewhere in the world.
In terms of currency changes, while the Swiss Franc was 5% weaker against the US Dollar as at 1 April compared to the same time last year, it has been relatively volatile this year, peaking close to its 2012 high at 1.10 USD to the CHF in February and while it was at its lowest of 1.05 USD around 1 April 2013 compared to last year’s low of just over 1.01 USD in late July 2012.
The Japanese Yen on the other hand has weakened by more than 20% against the US Dollar since September 2012 when 1 US Dollar bought around 0.0128 JPY compared to 0.01062 JPY around 1 April 2013.
One of the trends of 2012 was the rise of many Asian cities offsetting traditionally more costly European locations. In 2011 Asia took 4 of the top 10 positions while in 2012 this increased to 7. In particular, Australian cities rose rapidly up the rankings, primarily on the back of its strong currency. In 2011 there were no Australian cities among the top 10 most expensive cities. In 2012 Sydney was ranked 6th and Canberra 9th relative to other cities around the world. The 2013 survey sees a reverse of this trend with only 4 cities from Asia in the top 10, Tokyo 3rd, Hong Kong 5th, Yokohama 8th and Sydney 9th.
Comparison of the past 3 years top 10 Cities (Excluding Country Rankings)
|Rank||April 2013||April 2012||April 2011|
|1||Switzerland, Zurich||Japan, Tokyo||Japan, Tokyo|
|2||Switzerland, Geneva||China, Hong Kong||Venezuela, Caracas|
|3||Japan, Tokyo||Switzerland, Zurich||China, Hong Kong|
|4||Angola, Luanda||Switzerland, Geneva||Switzerland, Geneva|
|5||China, Hong Kong||Japan, Yokohama||Switzerland, Zurich|
|6||Venezuela, Caracas||Australia, Sydney||Japan, Osaka|
|7||Monaco, Monaco||Japan, Osaka||Brazil, Sao Paulo|
|8||Japan, Yokohama||Venezuela, Caracas||Japan, Nagoya|
|9||Australia, Sydney||Australia, Canberra||Liechtenstein, Vaduz|
|10||Norway, Oslo||Japan, Nagoya||Norway, Oslo|
For more comprehensive Cost of Living information go here.
Author: Steven McManus