The 10 Most Expensive Cities in the World (and How They Got That Way)

By Derek Thompson

The top four are all in Switzerland and Japan

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Reuters

Zurich is the most expensive city in the world, according to the latest Worldwide Cost of Living Survey from the Economist Intelligence Unit, which found the four priciest metros are all in Switzerland and Japan.

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The survey compares the price of hundreds of products and services, including food, rent, and transportation, in 131 cities. The prices are then indexed to New York City, which keeps a score of 100. Zurich knocked off Tokyo by a score of 170 to 166, which indicates that living in those cities is 70% and 66% more expensive than living in NYC, as measured in U.S. dollars. No American cities cracked the top 10. (If you find it hard to believe that so many cities in the world are more expensive than every U.S. metro, keep in mind that real estate prices aren't factored into the survey.)

Looking deeper down the list, some surprises emerge. New York City fell below Los Angeles into a tie with Chicago. Globetrotters might be surprised to learn that Cleveland finished just above Rio. The three cities at the bottom of the list were Karachi, Pakistan, Mumbai, and Tehran, all of which finished around 50, suggesting that they are half as expensive as New York City. This great graph from The Economist offers a good sampling of large metros:

The data is fascinating enough, in a trivial sense. But it begs the question: What makes a city expensive, anyway? As a general rule, prices are higher in richer countries. This seems so obvious, one's tempted to stop there. But the reasons are interesting to pick though.

It begins with trade. You can think of an economy as making two kinds of stuff. There's the stuff you can put in boxes and trade, like auto parts, and the stuff you can't put in boxes or trade, like hair cuts. If a country gets good at making stuff it can trade for money, it becomes richer. As export income and investment flows in, incomes rise, wages rise, and prices rise across the board. Even the prices for the (utterly non-boxable) haircuts.

This theory -- a tragically oversimplified version of what economists call the Balassa-Samuelson effect -- explains some of the price difference between cities around the world. But not all of the difference. Not even close. Restrictive urban policy raises the price of rent in similarly productive cities. Energy taxes raise the price of gas. Tariffs raise the price of imports.

In Switzerland, rising prices over the last few years have little to do with gas prices, or new zoning law, or the rising productivity of Zurich's workers (not to impeach the industrious Swiss!). Instead, they have much more to do with Greece and Germany. The debt crisis sweeping Europe has created a flight to safety for investors. Swiss Francs are considered safer, and the rising Franc has pushed up prices. Japan and Australia have also seen strong currency appreciation over the last few years, which made it relatively expensive for foreigners.

In cheaper cities throughout the developing world, especially in Asia and the Middle East, governments have used price controls to restrain the appreciation of their currency. This strategy keeps auto parts cheap, which makes the West buy more of them. But it also keeps hair cuts cheap, which means barbers have weaker income.

If Zurich is truly the world's "most expensive city," it is not the most expensive city for everything. For example, according to the report, the most expensive loaf of bread belongs to Tokyo, where a 1 kg-supermarket loaf costs $7.96, compared to Hong Kong ($2.91). But a liter of gas in Hong Kong costs $2.13, more than a liter in Tokyo. Meanwhile, Moscow has much cheaper bread and gas, is the 42nd priciest city to live in, but its hotel rates are the most expensive in the world. There are surely fascinating reason for all of these differences, but to unpack them would probably require a very long book.

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This article available online at:

http://www.theatlantic.com/business/archive/2012/02/the-10-most-expensive-cities-in-the-world-and-how-they-got-that-way/253149/