Expatriate International Cost of Living

Internationally comparable cost of living data is crucial to forming sustainable expatriate pay policies and monitoring progress.  Market exchange rates give misleading comparisons because they do not reflect salary purchasing power differences. Purchasing Power Parity (PPP) accounts for price differences between countries and so measures real quantities.

The purpose of an expatriate pay program is to maintain employee spending power and standard of living irrespective of global location. Salary Purchasing Power Parity (SPPP) is the amount of salary that equalizes the purchasing power of different currencies given the relative cost of the same basket of goods (cost of living) at the exchange rate versus one US Dollar.  This means that a given salary, when converted into different currencies at the SPPP rates, will buy the same basket of goods and services in all countries.

Currency exchange rates are highly volatile as they are based on short-term factors and are subject to substantial distortions from speculative movements, economic outlook and government interventions. Currency exchange rates, on their own, do not in our view reflect cost of living changes in the short-term. Exchange rates, even when averaged over a period of time such as a year, are not a good measure of the comparative value of a salary in relation to its comparative international purchasing power. In the short to medium term at least, apparent changes in the comparative level of remuneration between one country and another may be principally a function of changes in the exchange rate as opposed to cost of living.

The basket of goods and services used in SPPP calculations is derived on an International basis and includes certain items often excluded from expatriate cost of living data (most notably housing costs), however any or all of the 13 basket groups can be included or excluded from a calculation.  SPPP’s provide a reasonably good picture of the differences in standards of living for individual’s resident and paid in different countries.

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Country Full Name: Belize.

Location: Belize is in Central America, bordering the Caribbean Sea, between Guatemala and Mexico.

Country Climate: Tropical; very hot and humid; rainy season (May to November); dry season (February to May).

Country Terrain: Flat, swampy coastal plain; low mountains in south.

Major Languages: English (official), Spanish, Mayan, Garifuna (Carib), Creole.

Major Religions: Christianity.

Country Population: 0.32 million (2008 est.) 0.33 million (2009 est.).

Country Economy: The economy of Belize is small and essentially private enterprise economy that is based primarily on agriculture, agro-based industry, and merchandising, with tourism and construction recently assuming greater importance.

Currency: Belize Dollar (BZD).

Country Inflation: 6.4% (2008 est.) 2.7% (2009 est.).

City: Belmopan is the capital of Belize.

City Economy: Belmopan is the seat of government. As a result many of its inhabitants work for the national government in various administrative or technical roles. Belmopan currently has business establishments, international banks, several local financial institutions, a modern bus terminal and market complex.

Cost of Living: Belmopan has an overall cost of living index which equates it with low cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Belmopan is currently ranked 243 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more cost of living information on Belize, Belmopan

Country Full Name: Kingdom of Belgium.

Location: Belgium is in Western Europe, bordering the North Sea, between France and the Netherlands.

Country Climate: Temperate; mild winters, cool summers; rainy, humid, cloudy.

Country Terrain: Flat coastal plains in northwest, central rolling hills, rugged mountains of Ardennes Forest in southeast.

Major Languages: Dutch (local variant called Flemish), French, German.

Major Religions: Christianity.

Country Population: 10.7 million (2008 est.) 10.7 million (2009 est.).

Country Economy: The economy of Belgium is a modern, private enterprise economy that has capitalized on its central geographic location, highly developed transport network, and diversified industrial and commercial base.

Currency: Euro (EUR).

Country Inflation: 4.5% (2008 est.) 0.15% (2009 est.).

City: Brussels is the de facto capital city of the European Union (EU) and the largest urban area in Belgium.

City Economy: Serving as the centre of administration for Europe, Brussels’ economy is largely service-oriented. It is dominated by regional and world headquarters of multinationals, by European institutions, by various administrations, and by related services, though it does have a number of notable craft industries, such as the Cantillon Brewery, a lambic brewery founded in 1900.

Cost of Living: Brussels has an overall cost of living index which equates it with high cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Brussels is currently ranked 44 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Belgium, Brussels Cost of Living

Belgium, Brussels Cost of Living

Engagement is a fairly recent term in business. In the past the talk was about “attracting, motivating and retaining” expatriate employees. All three strategies focused primarily on money. A competitive salary that takes into account the relative cost of living, exchange rate and hardship together with global expatriate benefits such as longer vacations, flights home, private school, club membership and the like were typically used to “attract” expatriates to where their skills were needed most. Bonuses, performance based pay, and recognition plans were used to “motivate” expatriates. Shares, retirement plans and tax-free gratuities were typically used to “retain” expatriates using the so-called golden handcuff approach.

The financial crises and recession have in my view provided further proof that money alone is not enough. When money gets tight will your expatriate employees stay and will they be motivated? Money on it’s own will not motivate or retain an expatriate when annual salary increases are reduced, bonuses are negligible if they are paid at all and shares are not performing.

To ensure expatriates will stay when times get tough, an engaged expatriate is required. An engaged expatriate is one who is committed to the organization (i.e. the host organization). An engaged expatriate is willing to exert extra effort in accomplishing tasks important to the achievement of the organizations goals.

Recruitment and Promotion
Ensuring that expatriates are put in the right job is a prerequisite for engagement. In reality expatriates are often hired because their skills are not locally available and because they are willing to relocate to a location that most people would not want to live in. As a result expatriates are often hired for their technical skills and not for their behavior, which in their home country would have been closely analyzed and subject to rigorous reference checking. It is critical that the right expatriate is recruited into the right job taking all aspects into account, including personality, age, culture, attitude, and previous track record through quality reference checks.

High Performance Standards
Average performance is usually associated with easy, low demand work. Responsibilities and accountabilities need to be well defined with clear perceptible differences compared to those they report to and to those who in turn report to them. Where differences in accountability are not clearly defined the result is a “non-job”. It is not possible to perform in a non-job as it is not clear who is accountable for what!

For engagement, expatriates need to be challenged with high standards of performance that will test their abilities fully. Hiring over qualified, over experienced expatriates into jobs that are too small for them will leave them unchallenged. Expatriates often perform badly when unchallenged by the job, but rise to accomplish the most difficult tasks when properly challenged.

Feedback
An engaged expatriate requires feedback. With this information the expatriate can control their outputs, measure how they are doing, guide themselves to reach their goals, and accept complete responsibility for their tasks, assignment and job.

In conclusion I ask again. When money gets tight will your expatriate employees stay and will they be motivated? A competitive salary that takes into account the relative cost of living, exchange rate and compensation for the hardship of living in an unfamiliar/foreign location together with global expatriate benefits will attract and to some degree retain expatriates. However if you really want your expatriates to stay motivated when times get tough you need to ensure you have engaged expatriates. Engaged expatriates are committed to the organization. You can better engage your expatriates by ensuring that expatriates are put in the right job, are challenged with high standards of performance that will test their abilities fully, and by providing feedback on how they are doing.

This article may be freely copied as long as reference is made to http://www.xpatulator.com/

Country Full Name: Belarus.

Location: Belarus is in Eastern Europe, east of Poland.

Country Climate: Cold winters, cool and moist summers; transitional between continental and maritime.

Country Terrain: Generally flat and contains much marshland.

Major Languages: Russian, Belarussian (both official).

Major Religions: Christianity.

Country Population: 9.7 million (2008 est.) 9.6 million (2009 est.).

Country Economy: The Belarusian economy remains largely state-controlled. Thus approximately half of Belarusians are employed by state-controlled companies. The country relies on imports such as oil from Russia. Important agricultural products include potatoes and cattle byproducts, including meat. As of 1994, the biggest exports from Belarus were heavy machinery (especially tractors), agricultural products, and energy products.

Currency: Belarusian Ruble (BYR).

Country Inflation: 14.8% (2008 est.) 13.0% (2009 est.).

City: Minsk is the capital and largest city in Belarus.

City Economy: Minsk is the economic capital of Belarus. It has developed industrial and services sectors.

Cost of Living: Minsk has an overall cost of living index which equates it with low cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Minsk is currently ranked 214 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Belarus, Minsk Cost of Living

Country Full Name: Barbados.

Location: Barbados is a Caribbean, island in the North Atlantic Ocean, northeast of Venezuela.

Country Climate: Tropical; rainy season (June to October).

Country Terrain: Relatively flat; rises gently to central highland region.

Major Languages: English (Bajan, an English-African dialect, is widely used).

Major Religions: Christianity.

Country Population: 0.276 million (2008 est.) 0.276 million (2009 est.).

Country Economy: The economy of Barbados has transformed itself from a low-income economy dependent upon sugar production, into an upper-middle-income economy based on tourism and the offshore sector.

Currency: Barbados Dollar (BBD).

Country Inflation: 8.1% (2008 est.) 3.5% (2009 est.).

City: The City of Bridgetown is the capital and largest city of the nation of Barbados.

City Economy: Bridgetown is a major West Indies tourist destination, and the city acts as an important financial, informatics and convention centre in the Caribbean region.

Cost of Living: Bridgetown has an overall cost of living index which equates it with middle cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Bridgetown is currently ranked 124 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Barbados, Bridgetown Cost of Living

Country Full Name: People’s Republic of Bangladesh.

Location: Bangladesh is in Southern Asia, bordering the Bay of Bengal, between Burma and India.

Country Climate: Tropical; mild winter (October to March); hot, humid summer (March to June); humid, warm rainy monsoon (June to October).

Country Terrain: Mostly flat alluvial plain; hilly in southeast.

Major Languages: Bengali.

Major Religions: Islam, Hinduism.

Country Population: 161.7 million (2008 est.) 164.7 million (2009 est.).

Country Economy: The economy of Bangladesh remains a developing nation despite continuous domestic and international efforts to improve its economic and demographic prospects. Its per capita income in 2008 was US$520 compared to the world average of $10,200. Bangladesh grows very significant quantities of rice (chal), tea (Cha) and mustard. Although two-thirds of Bangladeshis are farmers, more than three quarters of Bangladesh?s export earnings come from the garment industry. A large part of foreign currency earnings also comes from the remittances sent by expatriates living in other countries.

Currency: Bangladeshi Taka (BDT).

Country Inflation: 7.7% (2008 est.) 5.3% (2009 est.).

City: Dhaka is the capital of Bangladesh and the principal city of Dhaka District.

City Economy: Dhaka is the commercial heart of Bangladesh. The city has a growing middle class population, driving the market for modern consumer and luxury goods. The city has historically attracted a large number of migrant workers.

Cost of Living: Dhaka has an overall cost of living index which equates it with low cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Dhaka is currently ranked 253 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Bangladesh, Dhaka Cost of Living

Country Full Name: Kingdom of Bahrain.

Location: Bahrain is in the Middle East, it is an archipelago in the Persian Gulf, east of Saudi Arabia.

Country Climate: Arid; mild, pleasant winters; very hot, humid summers.

Country Terrain: Mostly low desert plain rising gently to low central escarpment.

Major Languages: Arabic.

Major Religions: Islam.

Country Population: 0.779 million (2008 est.) 0.795 million (2009 est.).

Country Economy: The economy of Bahrain is largely based on petroleum and natural gas, the only significant natural resources in Bahrain, which provide about 60% of budget revenues. Bahrain was the first Persian Gulf state to discover crude oil. Because of limited reserves, Bahrain has worked to diversify its economy over the past decade.

Currency: Bahraini Dinar (BHD).

Country Inflation: 3.5% (2008 est.) 3.0% (2009 est.).

City: Manama is the capital and largest city of Bahrain.

City Economy: Manama is the focal point of the Bahraini economy. Several multinationals have facilities and offices in and around Manama. The economic base for Manama itself is financial services, with over two hundred financial institutions and banks based in the CBD and the Diplomatic Area.

Cost of Living: Manama has an overall cost of living index which equates it with high cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Manama is currently ranked 66 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Bahrain, Manama Cost of Living

Country Full Name: Commonwealth of the Bahamas.

Location: The Bahamas are a chain of Caribbean islands in the North Atlantic Ocean, southeast of Florida, northeast of Cuba.

Country Climate: Tropical marine; moderated by warm waters of Gulf Stream.

Country Terrain: Long, flat coral formations with some low rounded hills.

Major Languages: English.

Major Religions: Christianity.

Country Population: 0.338 million (2008 est.) 0.341 million (2009 est.).

Country Economy: The economy of The Bahamas is that of a stable, developing nation heavily dependent on tourism and offshore banking.

Currency: Bahamian Dollar (BSD).

Country Inflation: 4.5% (2008 est.) 1.8% (2009 est.).

City: Nassau is the capital, largest city, and commercial centre of the Commonwealth of the Bahamas.

City Economy: Nassau has nearly 80 percent of the entire population of The Bahamas. The city is located on the island of New Providence, which functions much like a federal district. While there is no local government, it is governed directly as an administrative division of the national government .

Cost of Living: Nassau has an overall cost of living index which equates it with high cost of living locations. The overall cost of living index is comprised of the prices for defined quantities of the same goods and services across all 13 Basket Groups. Nassau is currently ranked 65 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more information on Bahamas, Nassau Cost of Living

Definition:
A Cost Of Living Index (COLI) is a price index that measures the relative cost of living over time. It is an index that measures differences in the price of goods and services.

A COLI measures changes over time in the amount that consumers need to spend to reach a certain level or standard of living. COLI is typically a number, where the Base Index is 100.

A Consumer Price Index (CPI) on the other hand is a measure of the average change over time in the prices paid by consumers. CPI is typically a percentage change compared to the previous period. An increase in CPI is called inflation, while a decrease is called deflation. Both the COLI and the CPI use a market basket of consumer goods and services.

A COLI is also used to measure the price of the same quantities and types of goods and services in different geographic locations. The COLI used in this way shows the difference in living costs between different locations.

An international COLI measures the differences in the local currency price of the same quantities and types of goods and services in different countries converted to a single currency. This shows the difference in relative living costs between international cities. The cost of living difference between locations indicates the amount that consumers need to spend to maintain a certain level or standard of living.

Amongst other uses, COLI’s are used by organizations and individuals in the calculation of expatriate salary and cost of living allowances in order to ensure consistent salary purchasing power between the home and host country.

Next we will discuss how to calculate a COLI between 2 locations applicable to expatriate employees.

Methodology:
For consistency the goods and services are grouped into similar/related basket groups.

For accuracy the exact quantity and type of each of the goods and services within each basket are defined. Using these definitions, the prices of the same quantities and types of goods and services in each geographic location is obtained from at least 3 different suppliers representative of those that would typically be used by expatriates.

When calculating the cost of living between 2 locations the difference in the aggregate cost of all the selected basket groups are examined in each location using the average reported price in each location for the same quantity of each item.  The basket groups are weighted according to Expatriate expenditure norms.

If for example the following 13 basket groups had the following weighting, The 13 basket groups do not count equally.:

•Alcohol & Tobacco (Weight 2.0%)
•Clothing (Weight 2.5%)
•Communication (Weight 2.0%)
•Education (Weight 5.0%)
•Furniture & Appliances (Weight 5.0%)
•Groceries (Weight 16.5%)
•Healthcare (Weight 5.0%)
•Household (Weight 30.0%)
•Miscellaneous (Weight 3.0%)
•Personal Care (Weight 3.0%)
•Recreation and Culture (Weight 6.0%)
•Restaurants, Meals Out and Hotels (Weight 2.0%)
•Transport (Weight 18.0%)

The prices for the defined quantities and types of goods and services in each location are gathered on a quarterly basis and the resulting index is updated for each of the 13 baskets in each location. These indexes are then used to calculate the COLI between any 2 locations. The COLI is the relative differential in the local cost of the basket groups and the ruling exchange rate between the 2 selected locations.

When comparing the cost of living between different locations the objective is to calculate the difference in the cost of living expressed as an index using one of the locations as the Base. We typically refer to the home location as the Base Location (Index = 100).

Practical Example:
Take for example a company headquartered in Location A with overseas operations in Location B and C. They send employees on 2 to 3 year assignments from time to time to Location B and C and need a set of COLI’s using Location A as the Base City in order to calculate assignment salary and cost of living allowances.

In our example Location A has an index of 92, Location B has an index of 129, and Location C has an index of 75.

Using our example, you want to know what the COLI is for Location B and C using Location A as the Base Location:

•Location A COLI = (Location A / Location A) X 100 = (92 / 92) X 100 = 100
•Location B COLI = (Location B / Location A) X 100 = (129 / 92) X 100 = 140.2
•Location C COLI = (Location C / Location A) X 100 = (75 / 92) X 100 = 81.5

The COLI indicates the difference in the cost of living between the locations. In the above example the COLI of 140.2 means that Location B is 1.402 times more expensive than Location A. In this example the COLI is positive (higher). This would mean that a person who moves from Location A to Location B would need to earn 40.2% more, to have the same standard of living in Location B as they have currently in Location A.

Location C on the other hand has a COLI of 81.5. This means that Location C is 0.815 times less expensive than Location A. In this example the COLI is negative (lower). This would mean that a person who moves from Location A to Location C could earn 18.5% less and have the same standard of living in Location C as they have currently in Location A.

Steps to calculating a cost of living index:
Given that it is costly and time consuming to create comprehensive baskets and to price them accurately in each location yourself, it is generally more cost effective to use a service provider such as Xpatulator. Xpatulator has comprehensive index data for 13 basket groups in 282 global locations updated quarterly and available online.

The following steps will help you create a set of COLI’s using Xpatulator’s Cost of Living Index Calculator (COLI):

Before you start you will need to have registered.

1) Login using your username and password
2) Check that you have sufficient credit(s)
3) Select “Calculators” from the left hand menu
4) Choose the Cost of Living Index Calculator (COLI): The COLI report calculates cost of living indexes for the locations you select using the base location you specify.  You can select between 1 and all 282 locations. You can choose from any one of the 13 baskets or you can choose the overall cost of living index for each location. The COLI report uses 1 credit per set of 4 cost of living indexes.
The calculator will prompt you for the following inputs:
5) Reference Information: Give your report a reference. This will help you identify your reports for future reference.
6) Base Location: Select the location that will be the base location. All other selected locations will be compared to this location.
7) Available Locations: Select all locations that you require a cost of living index for. Each credit will allow you to select 4 locations. You will notice that as you select each additional location the “Remaining number of locations you can select” will change decrease by 1. You will also notice that for each set of 4 locations the “Selected locations will cost” will increase by 1 credit.
8) Select which cost of living index basket you require. The Overall Cost of Living Index covers all 13 Cost of Living Baskets, weighted for expatriate expenditure norms.
9) Run Report: When you are sure that all your selection criteria are correct, click on run report. At this point the calculator will use the number of credits shown in the calculator. Just above the cost of living baskets the number of credits required will be displayed “Selected locations will cost: XX credits”. If you do not have enough credits you will need to either need to “Purchase Credits” using the left hand menu or decrease the number of locations selected.

Using Xpatulator’s Cost of Living Index Calculator (COLI) your report will look like the attached example View Demo

Applying a cost of living index to a salary calculation:
The COLI values are useful in calculating an appropriate salary in another location. A calculator such as Xpatulator’s Salary Purchasing Power Parity Calculator (SPPP) calculates an appropriate salary using the COLI, exchange rate and hardship difference.

The salary used in the calculator is gross or net salary. We advise using net (after tax) salary. This has will result in a net salary result in the new location, which would then be grossed up for tax and any other statutory deductions in the new location. The calculator will then apply the following formula based on the selections in the calculator:

Salary X Cost of living Index Differential X Exchange Rate X Hardship Differential = Calculated Salary in new location

Applying the formula to our earlier example with a salary of $100,000 in Location A, sent on assignment to Location B, with an increase in hardship of 10% and paid in US Dollars:

•Location B COLI = 140.2
•Location C COLI = 81.5

Salary Calculation = $100,000 X 1.402 X 1 X 1.1 = $154,220

This means that an employee earning a salary of $100,000 in Location A, requires a salary of $154,220 in Location B to compensate for a 40.2% higher cost of living and a 10% higher level of hardship.

Using Xpatulator’s SPPP Calculator your report will look like the attached example
View Demo