What is the cost of living? Definition and example

The Cost of Living refers to how much money people need to live, i.e., purchase food, clothing, transport, a home, pay utility bills, health care, and other basic items. The amount of money an individual requires to maintain a minimum standard of living is the cost of living.

Cost of living image - 39393939393Economists and policymakers use it as a measurement that allows them to compare prices and expenses over time and also between different locations.

Cost of living adjustments, or COLAs, are also periodically applied to wages, salaries, and benefits to offset inflationary pressures and maintain purchasing power.

New York City, for example, has a much higher cost of living than Buffalo, New York State. This means that people have to spend more to maintain an average quality of life in New York City than in Buffalo.

Investopedia has the following definition of the term:

“The cost of living is the amount of money needed to sustain a certain standard of living by affording basic expenses such as housing, food, taxes, and healthcare. The cost of living is often used to compare how expensive it is to live in one city versus another.”

Cost of living vs. standard of living

Some people use the two terms interchangeably. This is a mistake. Their meanings are completely different.

  • Standard of living

The standard of living of a country, region, or town refers to how well people live there. It is an indication of people’s general wealth, comfort, material properties, health and access to health care, level of education and access to it, and ability to pay for necessities and luxuries.

  • Cost of living

This is simply how much it costs to live in a certain way in a specific geographical area, i.e., how much you need to spend to maintain a specific standard of living.

Inflation rates play a critical role in the cost of living, as rising prices can significantly affect purchasing power and the affordability of basic goods and services.

The world’s most expensive cities

Photos of Singapore and Zurich - they shared first place as the world's most expensive city.
Created by Market Business News using Wikipedia images.

According to cnn.com, the three most expensive cities in the world are Zurich and Singapore.

Below is CNN’s list of the world’s most expensive cities. Two cities share first and second place, two share third and fourth, and two share eighth and ninth:

1. Zurich (Switzerland) and Singapore (tie)

3. New York (USA) and Geneva (Switzerland) (tie)

5. Hong Kong (China)

6. Los Angeles (USA)

7. Paris (France)

8. Tel Aviv (Israel) and Copenhagen (Denmark) (tie)

10. San Francisco (USA)

According to report author Roxana Slavchev:

“European cities tend to have the highest costs in the household, personal care, recreation and entertainment categories-with Paris being a good representative in these categories—perhaps reflecting a greater premium on discretionary spending.”

London was the most expensive city globally in 2014. However, since the Brexit referendum, when the pound sterling dropped in value, it has disappeared from the top ten.

Compound phrases with “cost of living”

A compound phrase is a term that consists of more than one word. Here are five compound terms that contain the words “cost of living”:

  • Cost of Living Index

A theoretical price index that measures the relative cost of living over time or regions.
For example: “The cost of living index for the area has gone up by 5% this year, indicating a significant increase in daily expenses.”

  • Cost of Living Allowance

Additional money granted to employees to cover higher living costs in expensive areas.
For example: “The company offers a cost of living allowance to employees in the New York office due to the city’s high expenses.”

  • Cost of Living Crisis

A situation where living expenses rise rapidly without a corresponding increase in household income.
For example: “Many families are facing a cost of living crisis as housing and food prices continue to skyrocket.”

  • Cost of Living Calculator

A tool that compares the cost of living between different cities or regions.
For example: “Before accepting the job offer, I used a cost of living calculator to see how far my salary would go in the new city.”

  • Cost of Living Raise

An increase in salary or wages to match the rise in cost of living expenses, usually due to inflation.
For example: “With the annual review coming up, the staff is hopeful for a cost of living raise to keep up with the increased rent and utility costs.”

Video – What is the Cost of Living?

This video, from our YouTube partner channel – Marketing Business Network, explains what ‘The Cost of Living’ means using simple and easy-to-understand language and examples.