How to Calculate a Cost of Living Index

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

Brazil, Brasilia Cost of Living April 2010

Country Full Name: Federative Republic of Brazil.

Location: Brazil is in Eastern South America, bordering the Atlantic Ocean.

Country Climate: Mostly tropical, but temperate in south.

Country Terrain: Mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt.

Major Languages: Portuguese.

Major Religions: Christianity.

Country Population: 189.6 million (2008 est.) 191.5 million (2009 est.).

Country Economy: The economy of Brazil is a federal economy . Brazil is the ninth largest economy in the world and the second largest in the Americas, after the United States.

Currency: Brazilian Real (BRL).

Country Inflation: 5.7% (2008 est.) 4.8% (2009 est.).

City: Brasília is the capital of Brazil.

City Economy: The major roles of construction and of services (government, communications, banking and finance, food production, entertainment, and legal services) in Brasília's economy reflect the city's status as a governmental rather than an industrial centre.

Cost of Living: Brasilia 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. Brasilia is currently ranked 3 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more cost of living information on Brazil, Brasilia

Botswana, Gaborone Cost of Living April 2010

Country Full Name: The Republic of Botswana.

Location: Botswana is in Southern Africa, north of South Africa.

Country Climate: Semiarid; warm winters and hot summers.

Country Terrain: Predominantly flat to gently rolling tableland; Kalahari Desert in southwest.

Major Languages: English (official), Setswana.

Major Religions: Christianity, indigenous beliefs.

Country Population: 1.8 million (2008 est.) 1.8 million (2009 est.).

Country Economy: The economy of Botswana is that of a rapidly developing market economy. Being closely tied with the economy of South Africa, the country's economy is one of the most successful in Africa and is dominated by the fast-growing service sector, world-renowned diamond industry, tourism, and manufacturing.

Currency: Botswana Pula (BWP).

Country Inflation: 12.6% (2008 est.) 8.4% (2009 est.).

City: Gaborone, is the capital and largest city of Botswana.

City Economy: Gaborone is the center of the national economy. The Southern African Development Community (SADC) has its headquarters in Gaborone.

Cost of Living: Gaborone 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. Gaborone is currently ranked 161 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more cost of living information on Botswana, Gaborone

Bosnia and Herzegovina, Sarajevo Cost of Living April 2010

Country Full Name: Bosnia and Hercegovina.

Location: Bosnia and Herzegovina are in South Eastern Europe, bordering the Adriatic Sea and Croatia.

Country Climate: Hot summers and cold winters; areas of high elevation have short, cool summers and long, severe winters; mild, rainy winters along coast.

Country Terrain: Mountains and valleys.

Major Languages: Bosnian, Croatian and Serbian.

Major Religions: Christianity, Islam.

Country Population: 4.0 million (2008 est.) 4.0 million (2009 est.).

Country Economy: The eceonomy of Bosnia and Herzegovina faces the dual problem of rebuilding a war-torn country and introducing market reforms to its formerly centrally-planned economy. Although agriculture is almost all in private hands, farms are generally small and inefficient, and the republic traditionally is a net importer of food. Industry is mostly overstaffed, a holdover from the socialist economic structure of Yugoslavia.

Currency: Bosnian Mark (BAM).

Country Inflation: 7.4% (2008 est.) 0.9% (2009 est.).

City: Sarajevo is the capital and largest city of Bosnia and Herzegovina.

City Economy: The economy of Sarajevo has been subject to reconstruction and rehabilitation programs after years of war. Amongst other economic landmarks, the Central Bank of Bosnia and Herzegovina opened in Sarajevo in 1997 and the Sarajevo Stock Exchange began trading in 2002. The city's large manufacturing, administration, and tourism base, combined with a large informal market, makes it one of the strongest economic regions of Bosnia and Herzegovina.

Cost of Living: Sarajevo 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. Sarajevo is currently ranked 260 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more cost of living information on Bosnia and Herzegovina, Sarajevo

Bermuda, Hamilton Cost of Living April 2010

Country Full Name: Bermuda.

Location: Bermuda is in North America, it is a group of islands in the North Atlantic Ocean, east of South Carolina (US).

Country Climate: Subtropical; mild, humid; gales, strong winds common in winter.

Country Terrain: Low hills separated by fertile depressions.

Major Languages: English, Portuguese.

Major Religions: Christianity.

Country Population: 0.067 million (2008 est.) 0.068 million (2009 est.).

Country Economy: The economy of Bermuda is very affluent and has one of the highest per capita incomes in the world, having successfully exploited its location by providing financial services for international firms and luxury tourist facilities .

Currency: Bermudian Dollar (BMD).

Country Inflation: 2.8% (2008 est.) 2.8% (2009 est.).

City: Hamilton is located on the north side of Hamilton Harbour, and is Bermuda's main port. Although there is a parish of the same name, the city of Hamilton is in the parish of Pembroke.

City Economy: Finance and international business now constitute the largest sector of Bermuda's economy, and virtually all of this business takes place within the borders of Hamilton.

Cost of Living: Hamilton 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. Hamilton is currently ranked 19 overall, most expensive place in the world for expatriates to live, out of 282 international locations.

For more cost of living information on Bermuda, Hamilton