Cost Of Living Calculator Step By Step With Examples

Cost of Living Calculator

The cost of Living Calculator is meant to compare the cost of the goods or, in other words, the expenses an average individual will expect to incur to acquire shelter, food, transportation, healthcare, energy, education, clothing, entertainment, and childcare in various regions.

About the Cost of Living Calculator

The formula for calculating the Cost of Living is below:

Cost of Living Calculator

Prices in Current year/ Prices in Base year

Prices in Current year
Prices in Base year

Wherein,

Prices calculated in the above formula could be arithmetic averages or weighted averages. This will be displayed in the examples below.

Although many kinds of cost of living indexes shall use various metrics and variables, most of them will set a base cost of living, which is displayed via 100. The calculated base can be either the cost of living in 1 place.

For example, Delaware could be the base city and set its cost of living to 100—or the base can be a means of several places. Then Other places will be measured against that base region, and accordingly, that place will be assigned a cost of living number.There are many methods used for the same as the family budget method, which is the weighted average method, and then there is an average arithmetic method. For instance, if, on average, it is 30% more expensive to stay in New York than compared to the base city, New York’s cost of living will be 130. This is what the cost of living calculator will represent.

How to Calculate Using the Cost of Living Calculator?

One needs to follow the below steps to calculate the Cost of Living.

Step #1 – Determine which region or region the cost of living is to be calculated, for example, whether it’s a comparison of region to region, one period to another period, or multiple regions average to another multiple region average.

Step #2 – Now find out the prices of the base, which is to be included in the denominator. The base could be either a year or a place, depending on the purpose.

Step #3 – Take out the prices of the region for which the cost of living is to be calculated or the current year’s prices in case the cost of living is to be calculated for some time.

Step #4 – Since the cost of living is to be calculated, a basket of goods will be considered, and prices for base and current will be aggregated.

Step #5 – Use an arithmetic average for the basket of goods consideration or weighted average per the requirement. It is recommended to use a weighted average.

Step #6 – Now divide the respective current year or numerator place average prices by the base year or denominator place per the required calculation.

Step #7 – The resultant figure will be the Cost of Living.

Example #1

The statistical department of country X wants to calculate the cost of living for 2019, taking 2009 as the base year.

Below are the details for the basket of goods which they feel will represent the best index for the cost of living for food prices.

The department wants to use a simple arithmetic average to calculate the cost of living in 2019 based on their obtained information.

Based on the above information, you are required to calculate the Cost of Living Index for 2019.

Solution:

We are given the prices for both years, which are 2009 and 2019.

2009 is the base year, and 2019 is the current year

We will first calculate the arithmetic average for both of the years below:

Now we can use the below formula to calculate the cost of living index for the year 2019:

= 28.26 / 20.94 * 100= 135% or 1.35

Hence, food inflation rose by 35% in the year 2019 when compared with the base year of 2009.

Example #2

Mr. V has been offered to locate Washington DC from New York due to a new opportunity for him. However, he was well settled in New York and quite happy and is now concerned with the cost of living expenses in New York compared to Washington, DC. He wants to know how much inflation is in Washington, DC, compared with New York.

Below are the details of the general average cost of each category obtained from reliable sources.

We are given weights that shall be used in the calculation.

You are required to calculate the Cost of living based on the given information.

We are given the prices for both places, New York and Washington, DC.

New York is the base region, and Washington DC is the current region

We will first calculate the arithmetic average for both of the places by applying weights first per below:

Now we can use the below formula to calculate the cost of living index:

= 7.46 / 6.42 * 100= 116% or 1.16

Hence, the cost of living inflation is greater by 16% in Washington, DC, compared with New York City.

Conclusion

As discussed above, the cost of living index is constructed to know how the prices of goods have changed across time or the region, and from that data, one can infer how the economy has functioned. There are instances where prices have reduced also, but in most cases, there are prices that have risen.