Relative pricing revisited

Yesterday I bought a pair of jeans. Normally it wouldn’t be a spectacular event (though one of my first blogposts was about a pair of jeans), but regular squatting has meant that I’ve been tearing through jeans well-at-a-faster-rate, and also that it’s been hard to find jeans that fit me well.

Basically, I have a well-above-average thigh and a well-below-average arse for my waist size, and that makes it hard to find readymade pants that fit well. As a consequence I’ve hardly bought trousers in the last 2-3 years, though I’ve been losing many pairs to the tear in this period of time.

And so when I found a pair of jeans that fit me comfortably yesterday I wasn’t too concerned about paying a record price for it (about 1.8 times the maximum I’d ever paid for a pair in the past). In fact, I’d seen another pair that fit well a few minutes earlier (and it was a much fancier brand), but it was well above budget (3 times as expensive as my historically costliest ever pair), and so I moved on (more importantly, it came with a button fly, and I’d find that rather inconvenient).

Jeans having been bought, we went off to a restaurant at the mall for lunch, at the end of which the wife pointed out that the money we paid for the lunch was more than the difference in prices between the two pairs of jeans. And that if only we would avoid eating out when it’s avoidable, we could spend on getting ourselves much more fancier clothes without feeling guilty.

I’ve written about relative prices in the past, especially about the Big Mac Index, and how it doesn’t make sense because of differential liquidity. After moving to London, I’m yet to come to terms with the fact that relative prices of goods here is vastly different from that back home; and that I haven’t adjusted my lifestyle accordingly leading to inefficient spending and a possible strain on lifestyle.

Food, for example, is much more expensive here than in India (we’ll use official exchange rates for the purpose of this post). The average coffee costs £2.5 (INR 225), which is about 10 times the price of an average coffee in Bangalore (I’m talking about a good quick cup of coffee here, so ignoring the chains which are basically table rentals). The average weekday takeaway lunch costs £6 (INR 540), which is again 10X what it costs in Bangalore.

Semi-fancy meals (a leisurely meal at a sit down restaurant with a drink, perhaps) are relatively less costly here, costing about £25-30 per head compared to INR 1200-1500 in Bangalore, a ratio of about 2X. A beer at a pub costs about the same, though cocktails here are much more expensive.

The alternative to eating out is, of course, eating in, and most “regular” ingredients such as vegetables and rice cost more here, though cheeses (which are relatively less liquid in India) are actually cheaper here. Milk costs about the same.

Controlling for quality, clothes cost about the same (or might even be less costly here when you go for slightly more fancy stuff). Electronics again cost about the same (they come through the same global supply chain). Contact lenses are more expensive here (though the ones I buy in India are manufactured in the UK!).

In my book, I have a chapter called “if you want to live like a Roman, live in Rome”. It’s about how different cities have different relative liquidity of goods. Similarly, different cities and countries have different relative prices, and long-term residents of these places evolve their spending to optimise for their given set of relative prices.

And when you move cities or countries, if you don’t change your lifestyle accordingly you might end up spending suboptimally, and get less welfare from life.

Once again this points out problems with international price indices being constructed based on a particular commodity, or set of commodities. For not only are different commodities differentially liquid (as I pointed out in my Mint piece linked above) in different places, but also the “standard consumption basket” also varies from city to city!

And if a Delhi-ite consumes lots of apples, and a Bangalorean consumes lots of oranges, you can’t make an apples-to-apples comparison in cost of living in these cities!