Kevin85ify
JF-Expert Member
- Apr 6, 2019
- 2,684
- 3,429
joto la jiwe,
The more developed you are the higher the cost of living because of the Balassa-Samuelson effect--which is to say, many services do not move in international trade, so their prices are determined by local demand and supply, rather than being affected by competition from imports. And because wages are much higher in developed countries than in developing countries, the cost of those services is much higher in the former than in the latter (no $300 haircuts in Dhaka.) And because services account for a large share of the overall price index, this accounts for most of the overall difference in price levels.
To the extent that people in developed countries choose to spend part of their higher incomes buying goods of higher quality than those chosen by their less prosperous counterparts in developing countries, that could account for part of the difference as well, though this part would represent mismeasurement - comparing the prices of dissimilar goods without recognizing that they were dissimilar
The more developed you are the higher the cost of living because of the Balassa-Samuelson effect--which is to say, many services do not move in international trade, so their prices are determined by local demand and supply, rather than being affected by competition from imports. And because wages are much higher in developed countries than in developing countries, the cost of those services is much higher in the former than in the latter (no $300 haircuts in Dhaka.) And because services account for a large share of the overall price index, this accounts for most of the overall difference in price levels.
To the extent that people in developed countries choose to spend part of their higher incomes buying goods of higher quality than those chosen by their less prosperous counterparts in developing countries, that could account for part of the difference as well, though this part would represent mismeasurement - comparing the prices of dissimilar goods without recognizing that they were dissimilar