The Balassa–Samuelson effect is the theory behind the Salary Purchasing Power Parity Calculator (SPPP). The goal 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 British Teacher’s with the same education and experience based in London. 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 SPPP Calculator will determine a far higher salary for the teacher assigned to Zurich, not because of productivity or performance which we assume would be the same, but to equalize their salary purchasing power.
So what exactly is the Balassa-Samuelson Effect? This theory was developed independently in 1964 by both Béla Balassa and Paul Samuelson and 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 this is because buyers can source from the lowest cost location. Most services however, must be delivered locally (e.g. hairdressing), and many manufactured goods have high transportation costs, which makes purchasing power parity (PPP) differences consistent. The Penn effect is that PPP differences typically occur in alignment: where incomes are high, average price levels are typically high.
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.
The cost of living rankings are released on a quarterly basis and measure the comparative cost of living in 780 locations across the globe.