Cost of living comparisons circulate widely and are among the least reliable numbers in general use. The core problem is that the comparison assumes a common basket, and the basket differs precisely where the price difference is largest.
| Cheap locally | local produce, local fish, local services |
|---|---|
| Expensive locally | imported goods, imported food |
| Depends entirely on | what the household actually buys |
| Comparison problem | different baskets, same label |
The two price worlds
An import-dependent island has two quite different price levels operating side by side.
Locally produced goods and services — produce, fish, ground provisions, local labour and services — are inexpensive relative to wealthy-country prices.
Imported goods — packaged food, appliances, vehicles, branded products, construction materials — carry freight, handling, small-volume markups and duty, and are expensive.
Which world a household lives in depends on what it buys. Two households in the same town can face very different effective costs of living, and no single index describes both.
Why the index does not settle it
A consumer price index measures change over time in a defined basket, weighted to represent average consumption. It is well suited to that job and poorly suited to cross-country level comparison.
- The basket reflects local consumption patterns, not another country's
- Weights differ between countries in exactly the categories that differ in price
- It measures change, not level
- Quality and variety differences are hard to adjust for
The consequence: an index is the right tool for asking whether prices rose here, and the wrong tool for asking whether it is cheaper here than somewhere else.
What drives prices
- Freight cost per unit, which is high because volumes are small
- Fuel prices, feeding electricity and transport
- Import duties and consumption taxes
- Small market size, limiting competition and volume discounts
- Storage and spoilage costs in a hot climate
- Exchange rate arrangements, which shape pass-through
The fourth is underweighted in most discussion. A market of this size supports few competing suppliers in any category, and limited competition contributes to price levels independently of transport and tax.
Reading a cost-of-living claim
- Ask what basket the claim uses
- Ask whose consumption pattern it assumes
- Check whether housing is included, and how
- Check the currency and the exchange rate used
- Check whether it compares like quality and variety
- Treat crowd-sourced comparison sites as indicative only
Point six is worth stating plainly. Sites compiled from user submissions have small and self-selected samples for a country this size, and a handful of entries can move a country-level figure substantially.
The relevant question instead
Rather than "is it expensive here", the answerable questions are:
- Expensive for whom — a resident on local wages, or a visitor
- Buying what — local produce, or imported brands
- Relative to what income, which is the comparison that matters
- Over what period, since price changes are what indices actually measure
The third is the one that makes cost-of-living statements meaningful. A price level is only interpretable against the income earning it, and a figure that seems low to a visitor may not be low relative to local wages at all.
Frequently asked questions
Why are cross-country cost comparisons unreliable?
They assume a common basket, but baskets differ precisely in the categories where prices differ most.
What is a price index good for?
Measuring change over time in a local basket. It is the wrong tool for comparing price levels between countries.
What besides freight and tax raises prices?
Market size. Few competing suppliers in any category means limited competition, independently of transport and duty.
What makes a cost-of-living statement meaningful?
Stating the income it is relative to — a price that seems low to a visitor may not be low against local wages.
