The cost of living is the amount of money that is needed to sustain a certain standard of living. A popular way to quantify the cost of living is to aggregate the prices of certain basic goods and services and compile indices that can be compared across different locations and over time. Such indices typically include prices for housing
, food, health care and other goods and services considered basic needs.
A prominent example of a cost of living index is the U.S. Consumer Price Index
(CPI) that is compiled by the U.S. Bureau of Labor Statistics based on prices of a certain market basket of goods and services across different urban areas. The cost of living in the United States is rising continuously. The 2011 CPI was 225 compared to an index value of 100 during the base period, between 1982 and 1984. I.e. consumer prices
in the United States more than doubled between 1984 and 2011. The fact that the CPI is based on a fixed basket of goods, and does not account for substitution between item categories, limits its suitability as a measure of the cost of living. That is why the Bureau of Labor Statistics introduced the Chained Consumer Price Index for the U.S.
in 2002. Based on the same bundle of goods, the C-CPI allows for substitution between categories and is thus considered a more accurate indicator for changes of the cost of living.
While the CPI is mostly used to measure inflation within the U.S.
, other cost of living calculations are used to compare price levels across different geographic areas. A worldwide city ranking based on the cost of living in 2009
, identifies Tokyo as the most expensive city in the world with Osaka Kobe and Paris ranking second and third. According to this index, Tokyo is one and a half times as expensive as New York which is ranked 23rd. A very popular indicator for the cost of living is the so called Big Mac Index
, which compares the average price of a Bic Mac across different countries. According to the 2011 index, Norway is the most expensive country in the world followed by Switzerland and Brazil, with the United States
ranked 9th. The Bic Mac index is clearly not very scientific but nonetheless serves as a palpable indicator of the cost of living.
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