The cost of living is high in India, as I mentioned the last time.
The dominant theme around where I live in Kalyani Nagar in Pune is one of massive construction. Multistoried residential buildings, shopping centers and office complexes are sprouting with astonishing rapidity. Despite the increase in the quantity supplied of floor space, the quantity demanded is growing even faster. This is evidenced by the fact that the price per square foot of built up space is growing at an astonishing 30 percent or more per year.
Right around the corner, the going rate is now around Rs 4,000 per square foot (or around $100 per square foot.) How expensive is that? Depends on who is paying, of course. Around the construction sites, hundreds of workers toil away ceaselessly. They earn around Rs 70 a day. I figured that to them, the per square foot cost is 2 months’ worth of earnings. Thus if about 800 square foot of space is reasonable for a family of four, the average laborer on the construction site would have to work for about 1600 months, or about 133 years to just be able to afford to buy the place. Imagine having to work for over one hundred years to be able to buy an apartment.
Of course, one needs more than just floor space in a building to live. There is food, clothing, utilities, and other needs such as medical, educational, entertainment, and so on. Taken together, all of these have a cost and they add up.
Time is a great measure for all sorts of things once you have an invariant in hand. For measuring distances, the speed of light provides an invariant measure. Thus, you can say that the sun is about 8 light minutes away and the nearest galaxy to the Milky Way, the Andromeda galaxy, is about 2.5 million light years away.
Costs can be measured in terms of time, provided we have an invariant. In our case, we really don’t have an invariant because the time to earn a unit of money varies from person to person, and from region to region. However, there is already a measure of average incomes in a specific location. That is the total production of final goods and services measured in monetary terms over a year for a specific collective of people that is called the gross domestic product (GDP). GDP divided by the number of people gives you the GDP per capita.
GDP per capita is a handy “local invariant” of sorts. India’s GDP per capita is about $450 per year. In a sense, you can say that the average person earns $450 a year and that is a local invariant. Now if something costs $450, then one may say that it costs one year. The “Per capita GDP Time Equivalent of Cost” is what I am provisionally proposing, or PGTEC. (The stress is on the word “provisionally.”) The units are time: so you could measure PGTECs in hours, days, months, years, and life times.
I can now denote the cost of an 800 sq foot apartment in my neighborhood for a laborer as 200 years. Since the working life of an average person (given the life expectancy of about 65 years and a productive life of about 40 years), the cost of the apartment would be five laborer lifetimes. Astounding.
What good is the PGTEC measure? Well, for one thing, it is easy to understand and compare costs across regions. The median house in the US costs around $70,000. And the per capita GDP is around $23,000. So the average house cost in terms of PGTEC is 3 years. Compare that to 200 years in India. India is therefore about 70 times more expensive than the US when it comes to housing.
OK, I am cheating. The cost of the house in my neighborhood in Pune is not really representative in the sense that on average an 800 sq foot apartment in India would probably cost half of that. But you get the idea. The average house in India would cost in terms of PGTEC about 100 years or so. (The actual numbers I leave to bean counters; I am not one. So there.)
It makes sense to distinguish between tradeables and non-tradeables. Tradeables are those things that can be transported from one location to another. For instance, gasoline is a tradeable while haircuts and baby-sitting are not. The price of tradeables in a specific location is the same the world over once you account for transportation costs and other barriers that add to the price such as taxes.
Let’s take the cost of a tradeable such as gasoline. Gas in the US costs $3 per gallon. That is, PGTEC cost of gas is around one hour in the US. In India, gas costs about Rs 200 per gallon. Translated into PGTECs, the cost is 72 hours. Gas (or petrol as it is called in India) is 72 times more expensive in India than in the US.
Now you may have heard that a haircut is cheap in India. Let’s do the numbers. In India, a haircut costs Rs 20, or about three hours in PGTECs. In the US, it costs $15 which in PGTECs is an hour and a half. So strictly speaking, a haircut in the US is cheaper for an American compared to a haircut for an Indian in India.
Let’s go to travel. In India, the cost of a round trip air ticket between Mumbai and Delhi is Rs 14,000 average. PGTEC cost is 240 days. The cost of a round trip between NYC and San Francisco is around $400 – a distance twice that of between Mumbai and Delhi. A bit of arithmetic reveals the equivalent to the Mumbai-Delhi deal would cost an American 3 days. Roughly air travel is 80 times as costly in India than in the US.
The other night I made the mistake of going to a Pizza Hut in my neighborhood. A medium size pizza costs Rs 300 which in PGTEC terms is 4 days or 48 hours. In the US, the average medium pizza (much larger than the one in India) costs $10, which in PGTECs is only 2 hours. A Pizza hut pizza in India is therefore about 24 times more expensive in India than in the US.
I have done some back of the envelope calculations and it appears that India is many times more expensive than the US in pretty much any goods and services I measure. This should not come as a surprise to anyone who has observed that Indians can afford a lot less stuff (goods and services) than Americans can. Basically, the cost of any good is the time that you have to spend to produce an equivalent amount of stuff so that you can exchange it for that good. Indians on average produce less stuff per unit of time and therefore they can buy less stuff per unit of time as compared to Americans.
In the next posting, I will explore the implications of this measure and perhaps detail out why the PGTEC is a better measure than the PPP (purchasing power parity) measure.
Until then, goodbye, goodnight and may your god go with you.