How is the cost of living calculated?

The traditional method for quantifying the cost of living is to aggregate the prices of certain basic goods and/or services, and then compile indices that can be used to compare different locations and time periods. Such indices typically include prices for housing, food, health care, and other goods and services that are to be considered basic needs. These indexes can also be for a fixed ‘basket’ of goods and services, with the consumer price index being the most prominent example. Such a method allows for objective assessments by looking only at the total cost of those goods and/or services included in the index, ignoring all other factors. This simplicity is the downside of this methodology though, in that it does not consider how varying levels of consumption can impact quality of life.

Where is the cost of living low?

Any determination of whether a place has a low cost of living cannot only look at how much basic items cost, but must also consider wage differentials between locations. For example, while the Big Mac Index suggests that a Big Mac is cheaper in Japan than the United States, this difference largely vanishes once factoring in the significantly lower average annual wages Japanese workers receive relative to their American counterparts. Using both wage and cost of living data, a recent study determined that Wyoming is the most affordable state in the U.S..

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