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Cost of living calculator: what is the cost-of-living index

Naturally, in order to maintain a healthy economic climate in the family or in the company one needs to take into account a considerably great number of diverse indices that allow the demonstration, prediction, acceleration or prevention of changes to financial flows. Of course, this problem is much more familiar to managers and financial analytics who are accustomed to the keeping abreast of events that may cause significant changes in structure and functioning of companies under their control. Nevertheless, the quick and qualitatively new development of different computer programs targeted at the determination of these indices allows even ordinary users to monitor their financial success and liquidity with high accuracy. One of the most effective instruments, which have been constructed for this goal, is the cost of living calculator toolkit, which proposes users an opportunity to determine their cost of living by analyzing different elementary indicators, saving them from having to resort to complex computations. Naturally, before using the cost of living calculator, one has to understand that there exist many different types of statistical indices, which can be determined using various significative. Therefore, one should select the most suitable form with an eye to receiving appropriate and correct results. Undoubtedly, among all these financial indices we can distinguish the cost-of-living index as the most useful indicator of financial wealth compared to analogical indicators of other cities. Hence, let us examine the main characteristics of this index along with the main methods of its determination.

The cost-of-living index (or the so-called general index) is one of the most effective and demonstrative financial indexes, which demonstrates the difference in living costs between different cities. In fact, it is widely used in various areas of study not only by specialists in the spheres of accounting and financial management but also by ordinary citizens and entrepreneurs of small and medium business who want to indicate the most favorable and advantageous cities and trade zones. In addition, it can be easily determined using simple and easily comprehensible methods, such as the ordinary cost of living calculator. Let us examine this method by a simple virtual experiment. In order to indicate the general index, we have to compare the cost of living in two cities. The base city is considered as the city whose index of the cost of living is equal to 100. In fact, in order to simplify computations and obtain demonstrative results, we always express the general index of the base city as 100. Then we have to find the cost of living in the destination. We can perform this operation by using specialized software tools, such as the cost of living calculator. The difference between these two indexes is the cost-of-living index. Let us study this method by a simple virtual experiment. For example, we have to compare two cities: Prague and Paris. Prague is the base city and Paris is the destination. Thereby, the cost of living in Prague is equal to 100 and the cost of living in Paris is 135. The difference between these two significatives expressed as a percentage is 35%. Therefore, Paris is 35% more expensive than Prague. Similarly, if Tokyo is the base city (100) and Warsaw is the destination (58) than the cost of living in Warsaw is 58% of the same characteristic in Tokyo.

In fact, the general index can be expressed as the ratio of the minimum expenditures, which are required to receive a distinct indifference graph under two different price modes. In truth, the inner logic of the cost-of-living index can be easily understood by expanding it in the contexts of comparisons over space and comparisons over time because some specific characteristics of the cost-of-living index, which can be easily ignored in one logical context, are obvious and demonstrative in the other. Naturally, with an eye to indicating these differences one can use various specially designed types of the cost of living calculator. Obviously, there exists a great amount of different techniques and approaches aimed at the indication of the cost-of-living index. In fact, it is an incontrovertible fact that adherents of different scientific trends determine this indicator, using methods that may significantly differ not only in details but also even in fundamental logical conceptions. Let us illustrate this statement by examining two different approaches to this theme. For example, we can examine the sets of prices in two fictional cities: A and B. When we use A as the base city, we assume that the sets of prices in it is equal to 100. Similarly, we perform the same operation when comparing a set of prices of B with analogical parameters of A. However, when performing this stage we can fall into the logical trap because according to the initial formulas we can obtain the same results for both of the cities. In other words, we can receive a situation in which each city is less expensive than the other. Obviously, we will obtain a paradox that cannot be solved in accordance with the initial parameters of the assignment. Therefore, in order to eschew these absurd results we have to use another index formula, which is specially designed to prevent incorrect conclusions when using the cost of living calculator. Moreover, we have to adhere to the logical principles according to which these interrelationships between different cities have to be circular. Thereby, if city A is selected as the base city, and cities B and C as determinations, successively, then the ratio must be maintained even when cities B and/or C are used as the base cities. For example, A (100) is the base city, B (150) is the determination then according to our computations: the cost-of-living index is 50%. Regardless of which city is chosen as the basic, this principal relationship has to be maintained.

A standard set of parameters used in the cost of living calculator: the fundamental statistical indicators

In addition, in order to avoid bewilderment in one’s thoughts it has to be mentioned and scrupulously studied that all statistical city reports always comprise two different indicators: the high and the mean indices. By comparing average prices in the base city and the examined one (based on the set of all prices for all items available in all examined trade centers and stores), we obtain a standard general index, normally used when analyzing the basic parameters of the cost of living by the cost of living calculator. Nevertheless, in some specific cases, companies that perform such an analysis use the high index, which compares the highest prices in the examined city with the average sets of prices in the base city. Surely, it is not a common practice; however, it is quite useful when planning financial transactions between the cities with significant differences in the level of life or cities in different countries that may maintain completely different price policies, systems of taxation and/or conditions for the development of business. For example, the problem of equally beneficial partial remuneration of different participants of some prolonged business agreement can be easily solved by using the high cost-of-living (general) index, determined using the standard cost of living calculator. For different participants who are interested in quick and multipurpose transactions, as well as in the exact division of the remuneration, this financial indicator is always much more suitable than the ordinary index. Hence, taking into account this example, it is quite recommended to specify what types of financial indices connected with the general cost-of-living index are of the main interest to the researcher before analyzing all obtainable data with the cost of living calculator. A careful examination of these nuances may save a great amount of time and resources.

Of course, as it was previously demonstrated, a great number of specialists could determinate completely different statistical indices when working with the same price data, but original methods of computation. Moreover, this purely theoretical problem of data discrepancies inevitably becomes much more serious and labor consuming when it comes to the final stage. Hence, when trying to indicate the cost-of-living index and other significant financial indicators, by working with the cost of living calculator, one has to know which technique is the most suitable for each concrete circumstances and which financial indices would demonstrate the most appropriate results. Obviously, this operation requires a great amount of additional researches and well-timed updates. Therefore, in order to clarify this situation and eschew all inaccuracies from the very beginning, let us study the standard set of different financial, social and individual parameters that are used as demonstrative and potentially effective when working with the personal cost of living calculator toolkit. Here is a concise list of these parameters:

  • State taxes.
  • Rent payments.
  • Council taxes.
  • Food costs.
  • Communication bills.
  • Traffic costs.
  • Insurance bills.
  • Money spend on entertainment.
  • Other spending.
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