Cost of Living Calculator
Cost of Living Calculator
Prices in Current year/ Prices in Base year
- Prices in Current year
- Prices in Base year
Cost of Living Calculator is meant to compare the cost of the goods or in other words, the expenses an average individual will expect to incur to acquire shelter, food, transportation, healthcare, energy, education, clothing, entertainment and childcare in various regions.
The formula for calculating Cost of Living is per below:
Wherein,
Prices calculated in the above formula could be arithmetic average or weighted average. This will be displayed in the examples below.
Although there are many kinds of cost of living indexes which shall use various metrics and variables, most of them will set a base cost of living, which is displayed via 100. The base that is calculated can be either the cost of living in 1 place.
- For example, Delaware could be determined as the base city and set its cost of living to 100—or the base can be a mean of several places. Then Other places will be measured against that base region and then accordingly that place will be assigned a cost of living number.
- For instance, if on average, it is 30% more expensive to stay in New York than compare to the base city, New York’s cost of a living number will be 130. This is what the cost of living calculator will represent. There are many methods used for the same as the family budget method which is the weightage average method and then there is an arithmetic average method.
How to Calculate Using the Cost of Living Calculator?
One needs to follow the below steps in order to calculate the Cost of Living.
Step #1 – Determine which region or region is the cost of living is to be calculated, for example, whether its comparison of region to region or one period to another period or multiple regions average to another multiple region average.
Step #2 – Now find out the prices of the base which is to be included in the denominator. The base could be either a year or place depending upon what is the purpose
Step #3 – Take out the prices of the region for which the cost of living is to be calculated or the prices of the current year in case the cost of living is to be calculated for a time period.
Step #4 – Since its cost of living is to be calculated, there would be a basket of goods that will be taken into consideration and prices for base and current will be aggregated.
Step #5 – Either use an arithmetic average for the basket of goods into consideration or weightage average as per the requirement. It is recommended to use a weightage average.
Step #6 – Now divide the respective current year or numerator place average prices by the base year or denominator place as per the calculation required.
Step #7 – The resultant figure will be the Cost of Living.
Example #1
The statistical department of country X wants to calculate the cost of living for the year 2019, taking 2009 as the base year.
Below are the details for the basket of goods which they feel will represent the best index for the cost of living for food prices.
The department wants to use a simple arithmetic average to calculate the cost of living in 2019 based on the information they have obtained.
Based on the above information, you are required to calculate the Cost of Living index for 2019.
Solution:
We are given the prices for both of the years which is 2009 and 2019.
2009 is the base year and 2019 is the current year
We will first calculate the arithmetic average for both of the years per below:
Now we can use the below formula to calculate the cost of living index for the year 2019:
- = 28.26 / 20.94 * 100
- = 135% or 1.35
Hence, food inflation has risen by 35% in the year 2019 when compared with the base year 2009.
Example #2
Mr. V has been offered to locate Washington DC from New York due to a new opportunity for him. However, he was well settled in New York and quite happy and is now concerned with the cost of living expenses over there in New York when compared with Washington DC. He wants to know how much inflation is there in Washington DC when compared with New York.
Below are the details of the general average cost of each category obtained from reliable sources.
We are given weights that shall be used in the calculation.
Based on the given information you are required to calculate the Cost of Living.
Solution:
We are given the prices for both of the places which are New York and Washington DC.
New York is the base region and Washington DC is the current region
We will first calculate the arithmetic average for both of the places by applying weights first per below:
Now we can use the below formula to calculate the cost of living index:
- = 7.46 / 6.42 * 100
- = 116% or 1.16
Hence, the cost of living inflation is greater by 16% in Washington DC when compared with New York City.
Conclusion
As discussed above, the cost of living index is constructed to know how the prices of goods have changed across time or across the region, and from that data one can be inferred how has the economy functioning. There are instances were prices have reduced also, but in most cases, there are prices that have risen.
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