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What Causes Differences in Cost of Living?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 July 2014
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    Conjecture Corporation
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It’s no secret that there are differences in cost of living expenses from one area to another. Several factors come into play that can lead to the standard of living in one area being significantly higher than the standard of living found in an area that is no more than a few hours away. In addition to differences in cost of living expenses between areas, there can even be differences between households, based not only on the amount of income flowing into those households, but also how that income is used.

One of the major issues that can lead to differences in cost of living expenses is location. While not always the case, it is not unusual for the basic cost of living in a metropolitan area to be somewhat higher than the cost found in a rural location. Here, there are a number of factors that may help to create the differences, including the type of taxes that are assessed, the effects of inflation on the local economy, and even the desirability of real estate. If an area is currently experiencing a high influx of new people into that city or town, this means increased demand for living space as well as for other essential services such as food and utilities. This in turn is likely to cause the cost of living to increase somewhat, as the competition for certain resources increase and people are willing to pay more for the limited supply.

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Along with these shifts in purchasing power parity that come with a higher demand for a limited supply of goods and services, differences in cost of living expenses can also be traced back to the way that households manage their income. For people who prefer to live more simply, there is often less of a demand for luxury items, or even big ticket purchases such as large homes or extensive property. In some cases, households that are somewhat frugal when it comes to luxury items may in fact have more income to divert into the purchase of items considered essential. As a result, these households may carry less debt while still having plenty to eat, enough to enjoy a full range of utilities, and even to be able to buy desired items with less stress on the household budget.

When it comes to differences in cost of living, one key factor that applies for both households and for specific geographic areas as whole is the amount of income generated. This is usually reflected as an average level of income that includes all residents for the period of time under consideration. For a household, this has to do with the income generated by individuals living in the residence that work or otherwise generate some type of regular income that goes to managing living expenses. When that income is relatively near or slightly exceeds the average cost of living in the area, this means that many households enjoy a standard of living considered equitable for the area. When the cost of living exceeds average income, there is a good chance that a sizable number of residents are living a standard that is below the considered average or norm.

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