What is cost of living?

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# What is cost of living? - PowerPoint PPT Presentation

What is cost of living?.

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### What is cost of living?

The cost of living in an area is the cost of maintaining a certain standard of living in that location. Changes in the cost of living over time are often shown in Cost of Living Indexes. The cost-of-living index, or general index, shows the differences in living costs between cities.

How is it calculated?

Starting by giving equal weight to each of the cost of living variables, including the livability of a location, an average of all the prices of each factor across all the cities is found, and these average values for each factor are used as the basis for the index comparison.

In the Mercer Cost of Living survey, which we use as our example, New York City is used as the basis for the index comparison.

The Economist Intelligence Unit formula, which is used for calculating cost of living, ensures that whether an associate is transferring from City A to City B or from B to A, the numbers are consistent and the formula still applies.

Why Use Cost of Living?
• To calculate a Cost of Living Allowance
• A COLA helps employers determine pay when sending employees abroad
• IMPORTANT because corporate assignments have become truly global
What Sort of Factors Must Be Considered in C.O.L. Calculations?
• Ranked on comparative costs of expatriate goods: housing, transportation, food, clothing, household goods, etc.
• The fluctuation of world currencies strongly impacts the index year to year
• Housing biggest factor in determining COL
• RENTING a house in some areas is up to \$30,000 monthly– this is due to the limited availability of housing that meets international standards -- crime problems/modern services
• The fundamental flaw of all cost surveys is that they convert local prices into US dollars, which means that any changes are as much a result of currency fluctuation as of price inflation.
Major Rankings in 2010 Mercer Report
• #1 - Luanda, Angola (Africa)
• #2 – Tokyo, Japan (Asia)
• #3 - Ndjamena, Chad (Africa)
• #4 - Moscow, Russia (Eurasia)
• London --- #17 (#4 last year)
• NYC - # 27 (used as base city with index of 100)
• NYC = Highest ranked US city
• Same 2 bedroom apt: NYC = \$4000, LA = \$2500 --- rents are far more expensive in NYC than any other U.S. city
• #279 - Indianapolis, IN (lowest US city on report)
2010 Mercer Index Summary Points
• Top 20 Cities nearly ALL African and Asian cities
• U.S. \$ has weakened against the majority currencies worldwide
• Cost of living in Africa is high (due to limited availability of imported goods that expatriates will purchase)
• Asian cities high on report– strengthening of many Asian currencies against U.S. (worth more when compared to the dollar)
Comparison of Two High Ranking Cities in Mercer Report

Used Asia’s #1 City Tokyo (#2) and

U.S.’s highest Ranking City, NYC (#27)

Item:

Combo Meal at McDonald’s

Milk (regular, 1 liter)

1 bedroom Apt (in city)

Disposable Salary

Tokyo:

\$6.32

\$2.25

\$1,190.84 (monthly)

\$3,572.00

NYC:

\$6.05

\$1.69

\$2,323.29 (monthly)

\$3,466.67

In Contrast, Lower Ranking Cities

Used Buenos Aires, Argentina (# 269)

and Indianapolis, IN (#279)

Item:

Combo Meal at McDonald’s

Milk (regular,

1 liter)

1 bedroom Apt

(in city)

Disposable Salary

Buenos Aires:

\$6.62

\$0.91

\$512.72 (monthly)

\$782.32

Indianapolis:

\$5.30

\$0.66

\$450.00 (monthly)

\$4,083.00

Other C.O.L. Indexes
• The i-Pod Index – uses how many hours people in various cities have to work in order to afford Apple’s MP3 player (iPod Nano: NYC=9 hrs, Mumbai=177 hrs)
Any Questions???

Cost of Living Comparisons