Dollars and Jens
Tuesday, October 18, 2005
price indices
How expensive is life in Manhattan?
The study considered what a typical family of four earning $60,000 annually spends and compared the costs of maintaining that lifestyle in more than 300 U.S. locations.

In Manhattan, that family would need to spend $146,060, 137.9 percent more than in the average American town. It topped runner-up San Francisco by more than $24,000 to earn the dubious distinction of being the nation's priciest town.

In the top five locations, which also included Los Angeles, San Jose, and Washington D.C., housing costs make up the lion's share of total living costs. The survey factored in local and state income taxes, costs associated with owning two cars (except in Manhattan), public transportation costs, goods and services, sales taxes, and costs to own a 2,500 square foot house (mortgage payment, insurance, real estate taxes, utilities and maintenance).

In Manhattan the survey figured those housing costs amounted to a whopping $100,532 annually and accounted for nearly 69 percent of all living costs.
Of course, no family of four with $146,060 to spend in Manhattan would live in a space with 2,500 square feet; if they did, it would cost, like, 69% of its budget.

The family would live in a smaller space, devoting more of its budget to other things. Those things would probably cost more dollars in Manhattan than they would in Iowa, but they would cost fewer square feet of living space. If you took all the stuff for which the $146,060 was spent in Manhattan, and tried to replicate that lifestyle in a more typical U.S. location, the cost would be lower than $146,060, but would be much more than $60,000 — it might be something like $80,000. The changes in lifestyle are tailored to mitigate the differences in price levels.

If everything in New York cost exactly 137% more than it did in Peoria, the "cost of living" ratio could be exactly stated, but because people who live in each location make their tradeoffs by buying what is relatively cheaper where they live, the actual cost of the Peoria lifestyle will go up much more when it's transplanted to New York than the New York lifestyle would. Because of these differences, there's no clear way of saying which costs should make up the cost of living; the best you can say is the ratio is sort of in the 146/60 to 146/80 range.

This is a standard problem associated with constructing, for example, the consumer price index. As costs of some things rise more quickly than others, other things being equal, people tend to move their purchases to other things, so that increases in prices don't hurt quite as much as you would think if you just measure how much it would cost for them to keep buying the same thing.

This is cross-posted, in part in case someone wants to comment.

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