I live in eastern Europe and in most of e. european countries the salaries are not that big, from 300 to 1000 euros depending on the country and most of the money can’t be saved after you deduct all the expenses like food, drinks, taxes, rent if you live in an apartment, gasoline,etc. , but most people don’t live that bad, the cars for example are usually in an average 5 to 10 years old which is not bad at all, of course some richer people have even newer cars,etc… What I can’t understand however is why do people in rich western countries also drive the same cars in an average and why do they also remain without of the majority of the money they earn after deducting all expenses? Sure the taxes are bigger, but why are electricity bills for example also bigger than in east Europe? Are they using a different type of electricity? No, so what’s the logic? There’s a great site for comparing prices in the world called Numbeo , unfortunately it is user moderated, so anyone can change data, but its generally reliable. I compared Budapest, Hungary and Oslo, Norway, going by simple logic it would be that life in Oslo would be way better since the salaries are huge, but in reality…it says that rent of a 1 bedroom ap. in Budapest is 300 euros and in Oslo 1100 Euros, price to buy a sq. meter of a apartment outside the centre is 800 euros in Budapest and 4000 in Oslo. Taxi start (the thing that you pay when you enter a taxi, regardless of the length of the distance) is 1 euro in Budapest, 10 in Oslo. More or less everything like milk, apples, bread,etc. is at least double the price. As I said this site may not be 100% reliable, but generally that is the trend, everything is at least 2,3 times more expensive in richer countries, so even if you get 2,3 times bigger of a salary, you are still in the same position and in reality you don’t actually get any more money and you can’t afford a better car or a better house than the ones you would afford if you lived in poorer countries, why is that? Why aren’t the prices the same everywhere…?
It isn’t.
You’re comparing prices from country X against salaries from country Y.
If salaries in country X are twice as high as those in country Y, for the same job, and price for the same item is twice as high in X as in Y, then the cost in terms of “% of salary” is the same in both locations.
This is why people who have emigrated to richer countries can save what amounts to peanuts in those countries’ terms, send it back home, and back home it becomes a very large amount. Conversely, your reaction when looking at prices from other locations.
Moving from the US back to Spain, my boss was fretting because my salary would be lower. But a smaller % of that lower salary got me 3x as much house: I was living better and saving a greater % of my income. OTOH, when I get offers for permanent jobs in Eastern Europe, and since I eventually want to retire back in Spain… hell no, because the amount I’d be able to save on a Polish or Hungarian salary would be crap here (plus additional considerations like for example that I can’t even say hello in either language).
You may want to look up the concept of “macdonald dollars”. That and other similar concepts are used to try and establish comparisons between costs of living that are more realistic than a direct currency conversion. Mark Twain put it in terms of “pounds of chicken”, it’s not exactly a new problem.
Just as a side note, if you plan on staying you may want to invest in some paragraph breaks. You know that big key, sometimes with a drawing of an arrow, to the right of the keyboard? It’s already paid for, and using it makes your writings a lot easier to understand.
In Oslo people have higher salaries, but that includes the clerk in the grocery store, the taxi driver, the man who delivers the groceries to the store, the farmer, etc. Which means prices for goods and services are also higher.
When comparing the prices and salaries in different countries you have to take into account that they aren’t independent factors.
People who work for electricity firms in Norway need to be paid more than people who work for electricity firms in Hungary, because everything is more expensive there, because the people who provide it have to be paid more because… etc etc…
I could save a bundle if I lived in Wisconsin and worked in New York City, but the commuting costs eat up all the cost-of-living savings.
In poor countries, there is limited economic development, which translates into few jobs. With few jobs to go around, people are willing to work for less money and without pesky things like pensions or worker safety regulations. Of course, poor labor markets mean poor earning power, so while stuff seems cheap it is often still out of reach for many people.
This makes anything that relies on labor quite cheap. In poorer countries, for example, even modest households often have domestic servants. Things like custom tailoring or intricate crafts can be bought for a song. Food also tends to be cheap, which is often also a result of government subsidies. Keeping people fed goes a long way toward keeping a government in power, and so governments often regulate food prices.
But not everything is cheap. Anything that needs to be imported will be expensive, especially as high tariffs may be one of the few ways a government has to raise funds. Things that are high-quality or up to first-world safety standard may be expensive or even entirely unavailable.
Local goods are more likely to be adulterated, counterfeit, unsafe or just plain cheaply made. While this may not be important to you for many goods, it can become important when we start talking about medical care or earthquake safety. In essence, you pay less because you are taking on more risk. Is your cheap apartment fire-safe? Earthquake safe? Free of hazardous materials? Do you have any renters rights? And how does your attitude toward this risk change when you have kids vs. being single?
So it’s all a little complex, but the critical factors are labor costs and regulations. And a major part of labor cost is related to immigration policies. Immigration policies are the most intense and all-consuming form of market regulation.
But I think the OP is asking why the price for the same item is twice as high in X as in Y. He mentions electricity as something he thinks should cost the same in both countries.
Built into the price for most items is cost of labor to produce that item. If labor costs more in a given country, the price will similarly need to go up.
That (high labor costs) mostly solves the question I suppose, but its still kind of crazy that people in east Europe (that were under communism, criminal privatizations, wars,etc.) and west Europe live practically with the same standard and can afford the same value (same 5-10 year old cars on an average, same houses,etc.) , instead of people in the west affording for example 2 new cars instead of one.
Judging by the myths that you can hear in eastern Europe (stories that our politicians tell us about how we will live like people in the west) someone would think that in the west everybody can afford 2 or 3 cars, a big house and not have a single problem, but in reality people are barely richer than people here, the only difference is that they can go to a poorer country when they retire and then live a normal life, but in their own country they’ll still have to live modest.
Part of it is that you’ve cherry picked an example of a country with overvalued currency (Norway/Oslo) and a country with undervalued currency (Hungary/Budapest). In other words, you’ve literally chosen nearly the most expensive and the cheapest countries and are comparing them.
What Nava was getting at earlier with the “McDonald’s Dollars” comments is actually more properly called the “Big Mac Index”. It’s a somewhat tongue-in-cheek metric used by economists to compare currency valuations across countries, in that nearly every country has a McDonald’s, and sells an identical Big Mac hamburger. So the price of a Big Mac is a good yardstick for how much a country’s currency value varies relative to its actual exchange rate.
So for example, a Big Mac goes for about 900 forints, which is 2.86 euros. But a Big Mac in the Eurozone goes for about 3.72 euros, and in Norway, it goes for 46.80 kroner/4.85 euros.
So as we can see, an equivalent product is roughly 25% cheaper in Hungary than in the Eurozone, and about 30% more in Norway, and something more like 45% more expensive in Norway than in Hungary.
That right there is a big piece of why things are more expensive- the exchange rates are skewed high and low in those two countries; they theoretically ought to even out vs. the Euro (or Dollar, or whatever) such that a Big Mac costs the same in all 3 countries when normalized to one currency.
There’s almost certainly also a component of charging what the market will bear going on as well. Richer countries or areas, have a sort of virtuous circle that goes on- people make more money, businesses charge more, etc…
You even see this within the US, and even within metropolitan areas; when I lived in Plano, Texas in about 2000, everything there was between 15% and 50% more expensive than in Grand Prairie, TX where I worked, predominantly because Plano was sort of a tony suburb of Dallas with a lot of very wealthy people and corporate headquarters, and Grand Prairie was a predominantly blue collar and Hispanic suburb of Dallas. Not low income, but definitely working class/lower-middle class.
So everything was more expensive in Plano than it was in Grand Prairie. You see that written large when comparing Oslo to Budapest.
People in the US are much richer than people in Eastern Europe. You mentioned Hungary in the OP, there are more than twice as many cars per person in the US as in Hungary and the average age of those cars is one year less. The number of rooms per capita in the US is more than twice as high as it is in Hungary. So from the perspective of Hungary the average person in the US has twice as many cars and lives in a big house. As for not having a single problem, the US has many places where the WIFI is slower than it should be.
There are various reasons that probably play a role.
Demand is higher. More people want to live in Oslo, so rent will be higher. However I’m not sure if that would affect other costs.
Regulations are higher in the West. When tata motors released their $2500 car, it was determined that a car that could pass US safety and emissions standards, as well as drive at interstate speeds, would cost 7k. Compare Chile vs Haiti when they had earthquakes. Chile had far. More building codes so they were not devastated as much as Haiti, but those building codes cost money. Safety, health, etc regulations all drive up costs, but the benefits are fewer sick and dead people.
Higher wages in the West result in higher consumer costs
Taxes are higher in the West, especially a place like Norway and those taxes are built into the prices you pay.
Stuff like that all plays a role. Having said that I have looked into moving from the US to Latin America and I wouldn’t save much money. Healthcare is much cheaper, but rent is only a little cheaper compared to the Midwest, in the Midwest an apartment starts at $400/month in a safe neighborhood if you ship around. Most other expenses are about the same, and some are higher.
Keep in mind also that prices are set by what people are willing to pay. Where I live in California housing is much more expensive than any other state. But I can’t buy a house in another state and move it and the land to California. Cars might be a little more expensive but if they were a lot more expensive I would go to another state and buy one.
Electricity costs vary widely between countries because they are extremely dependent upon a particular country’s regulations, as well as the cost of transporting whatever fuel is used to generate the power. Germany has much higher electricity costs than the UK and France, for instance, but much of the difference is taxes (which in Germany I think support its wind industry).
People in the US also spend much less of their income on food, obesity notwithstanding.
Not to mention that the cheapest food is often the stuff that contributes most to the obesity problem. Not so much eating too much food, but too much of the wrong kind of food (e.g., high sugar content).
The Big Mac Index itself is a whimsical metric because it looks at only one product, but the concept is basic economics - Purchasing Power Parity. True PPP indices look at hundreds, if not thousands, of identical products across different markets to try to understand what someone making 200000 Shillings / month in Uganda can really buy.
If you look at tables for things like GDP per capita for different countries, assuming it’s denominated in dollars, there are two ways you can normalize to dollars: exchange rates and PPP. The guy making 200000 Shillings / month in Uganda is pulling down $58.31 / month, or $700 / year. But he can buy much, much more with that, because land, housing, and food are much cheaper in Uganda. His PPP annual earnings are $2171.68. Still pretty low. Which is why most Ugandans don’t have cars, electricity, running water, or closets full of relatively new clothes.
In short, if you want to understand the difference in lifestyle for an average person from country X to an average person from country Y, PPP is going to do a much better job than using exchange rates directly. But if you want to understand why an internationally traded good (oil, cars, computer parts, etc) costs more in X than Y, exchange rates will be a better starting point.
Think of the economy as an ongoing auction. There’s a finite amount of goods available to be purchased. Buyers are competed against each other to buy these goods. If the buyers have more money they can make higher bids. So essentially in a rich economy things are more expensive because people have more money to spend.
You consider two cars for one butt “normal”?
Our tour guide in Copenhagen was from Oslo. She laughed about prices in Denmark being relatively cheap to her.
What are the differences in social welfare between “rich” countries and other ones?
In Germany taxes and prices were relatively high, but people got a ton of vacation and benefits like high unemployment and good maternity leave relative to the US.