Why some countries are more expensive

Rich countries are expensive, the Balassa-Samuelson effect

The strongest pattern in the data is that wealthier countries have higher price levels. Economists call the mechanism the Balassa-Samuelson effect. High-productivity economies pay high wages in their export industries; those wages spill over into local services, haircuts, restaurants, healthcare, that cannot be made more productive as easily. Service prices therefore rise with national income, pulling the whole price level up. This is why the most expensive countries are also among the highest-earning.

Tradable versus non-tradable

The single most useful distinction is between goods that can cross borders and services that cannot:

• Tradable goods - electronics, fuel, branded products, vary little between countries because trade arbitrages the price away.
• Non-tradable services - rent, dining, personal services, vary a lot because they are produced and consumed locally.
• Most of a country's cost advantage or disadvantage therefore comes from non-tradables, above all housing.

What else moves prices

Beyond income, several factors push a country's price level up or down:

• Tax policy, VAT and excise duties add directly to consumer prices.
• Geography, islands and remote regions pay more for imports and logistics.
• Currency strength, a strong currency raises measured prices in comparison.
• Regulation and competition, tightly regulated or concentrated markets tend to cost more.
• Public provision, where the state funds healthcare or transport, out-of-pocket prices fall.

Why expensive is not unaffordable

The crucial takeaway: because high prices usually accompany high incomes, an expensive country can still be affordable for the people who earn there. Switzerland tops the cost list, but its wages are high enough that residents are not necessarily worse off. That is exactly why we publish a best-value ranking that divides income by cost, and why a fixed external income, which does not rise with local wages, is best spent in a cheaper country. Read rent vs income for how to weigh the two.

Frequently asked questions

The single most useful idea: tradables versus non-tradables

If you remember one concept from this guide, make it the split between things that can cross borders and things that cannot. A television, a litre of fuel, a branded pair of shoes, these are tradable, and trade keeps their prices broadly similar across Europe, because any large gap invites someone to buy where it is cheap and sell where it is dear. A haircut, a restaurant meal, a month's rent, a visit to a local clinic, these are non-tradable, produced and consumed in the same place, and their prices are free to drift apart. Almost the entire difference in cost of living between countries comes from this second group, above all from housing and labour-intensive services.

That single idea unlocks the whole table. Rich, high-productivity countries pay high wages, and those wages flow into the price of local services, dragging the whole price level up, the mechanism economists name after Balassa and Samuelson. Poorer countries pay lower wages, so their services and rents stay cheap, even though the imported goods on their shelves cost much the same as anywhere. It also explains the most important caveat of all: because high prices and high wages travel together, an expensive country is not necessarily an unaffordable one for the people who earn there. To judge that, you have to put price and income on the same scale, which is exactly what the best-value ranking does.

The bottom line

Prices track wages, and wages track productivity, funnelled through services and rent that cannot cross a border. That is why rich countries are expensive and why expensive is not the same as unaffordable for the people who earn there. Hold the tradable-versus-non-tradable distinction in mind and the cost table stops looking arbitrary, it becomes a map of where local incomes and local prices have settled together.