I was arguing about this at law school today with some fellow students, and I am genuinely unsure of the answer, so I am throwing it to the masses. Hello, masses!
So we were arguing about taxation to begin with, which in turn led to the various costs of living in the United States and Canada as a measure of comparison purposes – me maintaining that they were higher in the USA, someone else that they were higher in Canada. Now, there’s no such thing as a “median cost of living” – well, I suppose there is, but due to regional variation it’s kind of useless as a statistic. So we turned to consumer price indexes.
Consumer price indexes, for those who do not know (and I want everybody to at least be able to follow the thrust of the conversation) are a method of tracking increasing costs of items as a way of partially measuring cost of living. You set a “year zero” – say, 1984. You buy $100 worth of goods in that era with 1984 dollars. Then you track the costs both backwards and forwards – so how much does it cost to buy that same $100 cost of goods in 1974, and 1994, and 1964, and 2004, and so on and so forth.
Now, when we were Googling for this sort of information, we couldn’t find a good CPI for both countries for the same year zero, so – and this is where the argument begins – I suggested instead using math to create a new year zero on the larger (American) CPI for comparison purposes. Now, I’m not going to pretend that this is exactly scholarly and I wouldn’t use it for a paper, but if, say, you want to turn 1996 into your year zero, and in 1996 it took $153 to buy whatever you bought in the previous year zero for $100, then it follows that if you divide every figure on the table by 1.53 you’ll get at least a rough estimate, suitable for back-of-the-envelope type calculation, of what things look like with 1996 as a year zero.
Needless to say, my friends disagreed. They also kind of disagreed with the concept of cross-comparing CPIs from Canada and the United States because you couldn’t guarantee that the same items would be in the $100 “basket.” My counterargument here is that Canada and the United States, in terms of culture and especially merchandise, are at least relatively equivalent in our shopping patterns – not perfectly homogenous to be sure, but close enough, as they say, for government work. Again, I’m just talking for back-of-the-envelope here, not for any real study.
So, my question is – which of us is right? Or right-er?
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Hmm… important thing to consider: cost of healthcare. Good healthcare, in the US, is expensive, even if you’re a healthy adult. So drop another $400 bucks a month into the US estimates for healthcare compareable to Canadian healthcare, and you’re getting close to accurate.
Oh, I don’t even want to get started into more nebulous factors like that; I’m just curious about CPI indexes. (Rent, for example, tends to be cheaper in Canada than in the United States, but I don’t want to bother tabulating it.)
Dividing all the CPI figures equally by 1.53 does not alter their relative magnitudes or percentage changes from year to year. It is no different than dividing yearly cost of living by 12 to get monthly cost of living.
You are both correct:
You can scale the figures until you have a common point.
You need to determine what the CPI is actually based on – does it include (not necessarily identical) similar things or is the list partially political (“Ignore the price of heating oil and we look Sooo much better!” “Include two quarts of booze every month – should help keep the numbers somewhat stable!”)
The CPI also isn’t constant even within the two countries — for example, the cost of living is generally much lower in rural areas not just in terms of housing, etc., but even measured solely by the price of common consumer items (though the Wal-Mart effect mitigates this to some extent).
For that reason this strikes me as an enormously difficult calculation/comparison to make, because CPI is really only useful for doing historical analyses within a certain area — comparing CPI between two geopolitical regions (even states and provinces) is really an apples-to-oranges issue. It’s a useful statistic for calculating a delta within a region, but setting the arbitrary zero doesn’t fix the apples-and-oranges part of the problem.
Then again, I’m not an economist, so I could be wrong, but I don’t think it’s very easy to properly repurpose the indicator; a second consideration (getting back to your original point) might be that the tax regimes in the U.S. vary wildly by region — in Texas, you might have a high property tax b/c there’s no state income tax, but that situation is reversed in many other states, and state sales tax rates vary widely, which all adds up to enormously different asset/transaction/investment incentivizations depending on what region you’re in.
I have to agree with Adam. I live in the Chicago area and my family is over by Ft. Wayne, IN. The cost of living just a three-hour drive away is drastically different. Start trying to compare all of the USA to all of Canada and there’s way too many variables to come up with meaningful data.
it’s too early for me to be thinking of Economics and I slightly resent you for making me do it.
Well, as far as establishing a common year zero, your method is as good as any. The differences in the baskets of goods is somewhat irrelevant as they are determined by the lifestyle adopted in the current region — and what we’re trying to measure here is the cost of a “typical lifestyle”.
To make the irrelevancy more concrete, I will give you an (somewhat contrived) example. In Canada, Snow shovels and toboggans could very well be included into the basket as things the typical family will need to buy ever couple of years. In the US, they would be less significant, but there would be other items, such as sunscreen and air conditioners.
Even though all 4 items are used in both countries, the weighting of their costs would be very different. This is because the Canadian lifestyle and the American lifestyle are different. However, we are talking about how much it costs to live the typical lifestyle in each region.
Dividing US CPI and Canadian CPI by a their respective 1996 values is a correct method to establish a basis for comparison. The caveat is that it would only be valid for short periods of time. That is, the further you get from a base year, the more inaccurate it becomes.
I question what this will tell you. CPI is really only an indicator of changes in costs, not the absolute value in costs. Setting a year zero at the 1996 value and then comparing the 2000 values would only tell you which country has had a greater increase or decrease in cost of living. It wouldn’t tell you which country has a higher cost of living.
A suggested methodology to answer the question:
1 Establish a median income for both countries.
2 Establish a poverty line. This must be a true poverty line (the annual cost of an essential basket of goods in each country). Don’t use a LICO (Lower income cut off) as this is purely a statistical tool. The same percentage of people will always be below the LICO even if we raised minimum wage to 50k. (That’s how it’s defined)
3 Divide the median by the poverty value, and then you have what we’ll call a “wellness index”
4 Repeat, but use the Lower – Middle Class line, Upper-middle class line — all of which would be based on different baskets of goods. The LMC basket could include a used car every 7 years, whereas the UMC line could include a luxury car, and a trip to tropics.
Don’t forget to include taxes and health care costs.
it’s too early for me to be thinking of Economics
Is it ever late enough in the day for economics to stop sucking?
The basic cost of living comparison you’re looking for is normally called a “bread basket” comparison because it compares basic food and living items that are largely consistent across regions, like bread. It is specifically intended to give a de-regionalized comparison of cost of living. Having said that, I don’t know how Canada stacks up against the US, I suspect you’d have to look regionally, eg US Northeast probably close to Canada vs. the US South which is probably a lot cheaper: food grows there, they spend less to heat their homes, etc. Having said that, you would need to factor in costs of subsidized healthcare and education – not aware of a stat that measures “real” COL.
WRT your CPI being consistent Canada vs US – I almost hesitate to say this because I’m guessing you’re arguing with Claudia and Karen – sorry ladies – but you’re right(er). The CPI goods tend to be largely accessible in both countries (i.e. mass produced – meaning by the U.S. based multinationals, Kraft, P&G etc). Skippy=Jiff, Crest = Crest, etc. They do that intentionally, so that it’s actually possible to make the comparisons they seek to make. The Economist regularly runs great stats – and reliable ones, which is a nice change for the media.
If on the other hand, you want organic heirloom tomatoes raised in an environment of zen and sexual and religious tolerance.. well, you’ll find lots of them in Toronto, in California, NYC and Austin for example. But try Detroit, Pickton, or Fort MacMurray and the prices sky-rocket, indicating it’s not a national issue but a local one, so your CPI Canada vs. US is not the right question there.
So net net, the answer you want is actually what you want to hear: you’re right(er).