What Is Relative Cost of Living?

Sometimes known as a comparative cost of living, a relative cost of living is a term that is used to describe the differences in the cost of living between two or more locations. Comparing these relative living costs requires evaluating the cost of living index associated with each location, and identifying the purchasing power parity related to each of those cities, towns, or rural areas. Taking the time to assess the relative cost of living can often help individuals and companies decide if relocating to a specific area would be a good idea or if considering an alternative location would be a better option.

One of the main reasons that individuals will consider the relative cost of living associated with a given location is to assess just how well they can live in that area, based on the total amount of income at their disposal. In order to determine which location would offer the best standard of living for the least amount of stress on finances, people will often consider such issues as the cost of housing, utilities, any tax obligations associated with living in the area, and even the cost of homeowners and other forms of insurance. Calculating the relative cost of living for one or more areas can be especially important for individuals who are on fixed incomes, and cannot look forward to an increase in that income when and if they do choose to relocate.

Businesses also consider the relative cost of living when deciding whether or not to build facilities in a particular location. Understanding the living costs in each area under consideration is important for several reasons. The business will have some idea of what type of wages and salary must be paid in order to attract qualified employees, as well as understand what type of taxes may be assessed on the business operation. Assuming a particular location offers lower annual and other taxes and the general expenses of establishing and operating the business facility in a specific area are favorable, there is a good chance the company will choose that location over other options.

As the term implies, a relative cost of living is somewhat subjective, in that all types of average expenses may or may not apply to a specific situation. For example, the average cost of a mortgage payment will not be particularly relevant to someone who plans on renting an apartment, but the average cost of apartment leases for units of a certain size will be very important. For this reason, the specific factors involved in identifying the relative cost of living between two or more locations may be adapted to the specific needs and concerns of the party comparing the living costs associated with several different locales.