Cost of Living, How to Calculate, Compare, and Rank
How to Compare the Cost of Living Around the World
The cost of living is how much you pay for housing, gas, food, clothing, and other everyday items. It is a useful measurement that allows you to compare expenses between locations and over time.
Many sources estimate the cost of living for you. It's important to keep in mind that it's an index, so your specific expenses might be higher or lower. For example, gas would cost more if you have a Hummer than it would if you have a Prius. But these cost-of-living estimates are useful tools for comparison.
How It's Calculated
Agencies calculate the cost of living by finding prices for a representative sample of goods and services. They then take into account how much of a person's budget would be consumed by the item in a year. For example, one gallon of milk might not cost much compared to one dress. But over a year, food would cost more than clothing. So the price for each item is weighted to account for its importance to a typical family's budget.
A more thorough example is the federal government's official measurement of inflation, the Consumer Price Index. The U.S. Department of Labor measures the prices of approximately 80,000 goods and services from 23,000 retail and service businesses. It then weights the items according to how they are used by a sample of 14,500 families. The CPI excludes income taxes but includes sales taxes.
There are different CPI databases that can be used. The CPI All Urban Consumers database is generally the one that is the most used.
Cost-of-Living Comparison and Index
Measurement indexes are generally used as a baseline for comparisons. A cost-of-living index gives you the percentage of difference between the cost of living in your current location and another area. In other words, your cost of living is the baseline for you.
Comparing costs-of-living is useful if you are considering moving to another area for work or retirement, as costs will be different depending on the location. It's particularly useful when traveling internationally to compare international locations because a comparison compensates for exchange rate differences.
The cost of living in your area would be the index of the comparison. If you have to live for a time on your usual pay when travelling or moving, you might end up over-budget if you're in a higher cost of living area.
Most cost-of-living calculators give you a direct dollar-for-dollar comparison between your location and another. You enter your salary, and it tells you what you would need to earn to have the same standard of living in the new location. Many also say what it costs for various categories, such as housing, food, and gas. Keep in mind these are estimates based on survey samples, so your particular cost of living may be significantly different.
Here are some calculators for the United States:
The U.S. Department of State also offers links to a variety of resources to help you determine the best place for you to live.
It might be worth using more than one calculator to conduct a comparison, to account for different expenses the numerous calculators won't share.
The Economist Intelligence Unit (EIU) provides a cost-of-living survey which compares cities around the world. It takes into account the relative cost of most goods and services.
Just looking at the cost of living doesn't tell you how easy it is to live in the city. Many factors, such as pollution or crime, don't necessarily create an immediate expense. These factors could simply make the city harder to enjoy. The EIU also provides a Global Liveability Index.
The EIU's index is the most thoroughly researched, but some reports are expensive. For less costly but less accurate comparisons, see these sites:
- Expatistan—Quick comparison between top cities. Data is submitted by visitors so the prices may not be accurate.
- Numbeo—Also a volunteer data-source. Provides more info on the quality of life, and you must register to use
- U.S. State Department—Provides a quick calculator for per diem rates in cities throughout the world. This site can give you a good comparison of relative costs in dollars.
Highest and Lowest Cost of Living Worldwide
It is important to understand the costs of living around the world—not simply for the sake of perspective, but in case you are considering living outside of the U.S.
Mercer 2019 Cost of Living Rankings provides information on the cost of living around the world. According to the site, these are the top 10 most expensive cities in the world for expatriates. The most expensive city is listed first:
- Hong Kong, HKSAR
- Tokyo, Japan
- Seoul, South Korea
- Zurich, Switzerland
- Shanghai, China
- Ashgabt, Turkmeistan
- Beijing, China
- New York, United States
- Shenzhen, China
The 10 least expensive cities in the world are often in unsafe, poverty-stricken, or war-torn areas. The lowest-cost city is first on the list:
- Tunis, Tunisia
- Tashkent, Uzbekistan
- Karachi, Pakistan
- Bishkek, Kyrgyzstan
- Banjul, Gambia
- Windhoek, Namibia
- Islamabad, Pakistan
- Tbilisi, Georgia
- Skopje, Macedonia
- Managua, Nicaragua
Cost-of-Living Adjustment and Increases
The cost-of-living adjustment (COLA) is the change made to make wages or benefits stay current with the cost of living. The government uses it for federal retirees and recipients of Social Security benefits. The Social Security Administration announced a 1.6% benefit increase for 2020.
Other applications for the costs of living include government workers' benefits, union negotiations, and corporate contracts for valued employees. Private employers sometimes also use the cost of living when employees are asked to relocate to a different location.
American Institute of Economic Research. "What Is the Everyday Price Index." Accessed March 13, 2020.
Bureau of Labor Statistics. "Comparing the Consumer Price Index With the Gross Domestic Product Price Index and Gross Domestic Product Implicit Price Deflator." Accessed March 13, 2020.
U.S. Bureau of Labor Statistics. "Consumer Price Index Frequently Asked Questions." Accessed March 13, 2020.
Bureau of Labor Statistics Handbook of Methods. "Chapter 17. The Consumer Price Index," Page 3. Accessed March 13, 2020.
The Economist Intelligence Unit. "Worldwide Cost of Living 2019." Accessed March 13, 2020.
Mercer. "2019 Cost of Living City Ranking." Accessed March 13, 2020.
Social Security Administration. "Cost-of-Living Adjustment Information for 2020." Accessed March 13, 2020.