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Bible Encyclopedias
Cost of Living
1911 Encyclopedia Britannica
or "COST OF LIVING. - Till recent years the phrase" Cost of Living "was only used loosely by economists when the balance between movements of wages and prices was in question, but from 1914 onwards during the World War the need of a measurement of the rise of prices gradually resulted in making the expression prominent in industrial and statistical discussions. In popular parlance it has since become a recognized economic problem. It has frequently been assumed that the term" Cost of Living "(or" High Cost of Living "- sometimes abbreviated to" H. C. L.") has a unique and definite meaning, and that accurate measurements can be applied to it, but in fact the meaning is vague and the statistical methods appropriate to it are complex and lead to results whose precision is not of a high order.
The phrase may be regarded as an abbreviation for" the cost in a defined region to persons typical of a defined social or industrial class of goods of a kind usually purchased at frequent intervals, by the consumption of which a certain standard of economic welfare is reached."We may usefully distinguish four cases: (a) where the standard is a physiological minimum; (b) where some conventional or average budget of expenditure is taken and the cost of the items in it is measured at different times or places; (c ) where the items are varied but the whole contents of the budget result in an unchanged standard of welfare; (d ) where both the contents of the budget are modified and the standard is raised or lowered. Case (b) is that which has in recent years been the subject of measurement, but case ( c ) is that which is in reality appropriate to the problem of measuring or adjusting real wages.
Case (a). - Prior to the World War attention was directed by Mr. Seebohm Rowntree ( Poverty, A Study of Town Life, 2nd ed. 1902) to the cost of obtaining in York (England) and elsewhere food, clothing, heat, light and shelter sufficient for a family to maintain itself in health and efficiency for work, when all possible economy was practised, subject to the availability of commodities and the legal requirements for housing, decency, etc. The minimum of food was computed in relation to the quantity of calories, carbohydrates and protein calculated by Atwater and others as necessary for maintaining health and vigour under various conditions of life, and dietaries were drawn up which contained the necessary constituents at the minimum aggregate cost; to this cost was added the expenditure on clothing, fuel, cleansing materials, etc., and rent, which was found to be customary among persons in regular work at the lowest rates of wages of adult men. The most natural meaning of the cost of living is perhaps the cost of maintaining the minimum standard thus described. The standard is, however, not scientifically definite; apart from questions as to the validity and applicability of the measurement by calories, it is clear that there must be a great difference between the amount of food necessary for work of low and of high efficiency; the Indian, Chinese and Japanese peasants live on a sparser diet and produce a lower output than the English or Americans; definable points are where efficiency is a maximum (which needs a more liberal diet than that considered by Mr. Rowntree) and where the value of additional efficiency exactly equals the cost of the additional food, etc., necessary (for whose ascertainment there are no observations); and Atwater's standard is in fact conventional (see Bowley, Measurement of Social Phenomena, chap. viii., 1915). If we drop the word" minimum "and speak of Mr. Rowntree's conventional standard for demarcating poverty, we can properly measure the change in the cost of living at this standard (if the facts are ascertainable). The varying cost of the official civilian rations, computed in Germany circa 1919, gave a measurement similar to that described. The cost of Mr. Rowntree's standard, and one modified in the direction of ordinary purchasers by Bowley, was worked out for certain English towns in 1913 ( Livelihood and Poverty, 1915). A legal minimum wage could be based on a standard thus defined, but in fact it is generally related to a higher conventional standard.
Case (b). - The usual method of measuring the change of the cost of living during and since the war has been as follows. Detailed statements of expenditure having been obtained from a number of working-class households (in most countries at some date prior to 1914), an average budget is formed showing so many pounds of meat, bread, etc., with the prices and expenditure in considerable detail. The average prices of the same foods are ascertained from time to time, and the expenditure necessary to purchase the former quantities at the new prices is computed. The cost of living (so far as food is concerned) is then taken as having increased or decreased in the same ratio as this standard budget. In many countries a standard of the same kind is established for clothing, fuel, light, rent, cleansing materials and some other articles, and the cost of the aggregate, including food, is computed from time to time. The result obtained (if the process were complete) would be the relative cost of maintaining a defined standard constant in every detail. It is generally expressed as a percentage; thus if the costs were 25s. and 30s. at the two dates, the ratio is loo: 120, the index number at the second date is 120 and the percentage increase 20.
This method cannot be carried out in its entirety for two reasons, namely, lack of information and change of quality of the commodities in the market. In most countries data of expenditure and prices are only obtained for principal commodities (meat, bread, etc.) and not for those on which little is spent (currants, pepper, etc.); unless owing to shortage of supplies there is a run on the articles not included, these omissions cannot affect the result significantly. In some countries expenditure is not known, but only prices, and then the resulting calculation is generally valueless; and in others currency is so variable that the computation is meaningless. In nearly all cases there is no sufficient knowledge of expenditure on clothing either in total or in detail, and it is often difficult to obtain adequate data for fuel and light or for miscellaneous items. The sums included in the calculations, in fact, account for only a part of ordinary household expenditure, but where most care has been given to the question the part is a large proportion of the whole. Classes of expenditure that are not strictly necessary, such as amusements, tobacco, alcohol, etc., are generally omitted, as are occasional expenses (doctors, purchase of furniture, etc.), but in some cases subscriptions to trade unions, etc., insurance payments and travelling to work are included. The miscellaneous expenses omitted become a large proportion of total expenditure as we go up the scale of incomes. The difficulty due to the change of quality of goods which has been so marked since 1914 is even more fundamental. Over any long period the actual constituents and quality of a pound of bread, a cut of meat, a pair of boots, change considerably, but from some points of view these gradual changes are not important. During the war, however, substitution of one commodity or ingredient for another was sudden and common, and the pre-war quality was unobtainable at any price, or if obtainable had a quite altered position in domestic economy. Consequently the prices included in the calculations were frequently not for the same things at different dates and the precision of the measurement was greatly diminished. After the Armistice there was some return to former qualities, but the change has been sufficient to undermine the foundation of the numbers, and a new basis is necessary, as discussed in the following sections.
It should be added that separate budgets ought to be formed (and in some countries have been formed) for different grades of income and for different classes of occupation, and also for single persons and for married persons with dependents.
The structure of the index numbers of the cost of living is shown most clearly by algebraic symbols. If QI, Q2, are the number of units of the commodities in the standard budget, and P 1, P2, P3
. the prices per unit at the date taken as starting point, and we write Qi X P1 = E1, Q2 X P2 = E2.. .. where E 1, E2, E3. .. are the expenditures on the commodities, then E = E 1 -f-E2. .. = Q1P1-FQ2P2
. is the whole expenditure at the first date on the standard budget. Let pi, p2, 13 3. .. be the prices per unit at a subsequent date; then Qi X pi = el, Q2 X p2 = e 2. .. are the presumed expenditures, and e =e1+e2+. .. =Q1p1+Q2p2 +.. is the whole expenditure. The ratio of the cost of the standard budget at the second date to that at the first, is e - _ Qlpl+Q2p2+.
- E Q1P1+Q2P2+. .. El+E2+ .. .
where r 1 =p 1 /P I (the price ratio for the first-named commodity at the two dates), r2 = p2/P2. ... The last expression shows that by this method the ratio of the costs of living is a weighted average in which the price ratios are weighted by the expenditures at the first date; hence we only need to know these expenditures and ratios, and not the actual quantities nor prices. In the official measurement in the United Kingdom only the quantities E and r are in fact used; this method is very convenient in dealing with rent (for which there is no natural unit of quantity) and with clothing (for which a general price ratio is obtained without any definition of unit). The general theory of weighted averages shows that a considerable roughness in the estimation of the smaller expenditures is smoothed out in the process of averaging, but that it is important to obtain precision in the case of large items, such as clothing, treated in a single entry, and rent. It is important, however, that the is should be accurately known when they differ much from one another, and the quality of the commodities that are priced should be the same at both dates.
The index number for the second date is E e Xioo, and the percentage increase is (i_i) X i oo.
Case (c). - It must be granted that when the cost of living is compared at two places or at two dates we ought not to assume that precisely the same quantities of the same commodities are purchasable in both cases, and in order to make a strict numerical comparison we need a test of equality of standard if not a means of comparing two standards. The problem so stated has not yet been completely solved. A measurement could be made on a strictly nutritive basis and the cost of purchasing in the most economic way the amount of calories (including the necessary protein) considered proper to health and efficiency could be ascertained in both countries or at both periods; but this would only give a theoretic solution, since it ignores the influence of custom and taste in diet, and, in fact, in developed countries relatively few people have been compelled to purchase their nutriment in the cheapest possible way. The actual practical question in England in 1921 was what was the cost of maintaining the pre-war standard of living in nutritive power and satisfaction or pleasure derived from food and clothing, allowance being made for changes in prices and available qualities. This statement introduces the vague word satisfaction, which it is not practicable to define exactly, though some mathematical methods based on economic principles have been suggested for ascertaining its equality in two cases.
It has been suggested (Bowley," Measurement of Cost of Living,"Journal of the Royal Statistical Society, May 1919, p. 354, and" Cost of Living and Wage Determination," Economic Journal, March 1920, p. 117) that an approximation could be reached by devising" a diet, based on available supplies, as nutritious, digestible and not less attractive than the pre-war diet, and estimate at what price it could now be obtained,"or" to frame a new budget of goods obtainable, and, in fact, purchased, by housekeepers with the same skill of adjusting purchases to desires as in the case of the earlier budgets. Instead of measuring satisfaction by formula, we may recognize that it is subjective and a matter of opinion, and obtain from representative working-class women a budget which in their opinion would now give the same variety and pleasure as a selected budget of 1914, care being taken that the energy value is the same. The result would give a new conventional budget, the ratio of whose cost to (that of) the pre-war budget would give a rough measure of the change of. .. the cost of living."It should be added that this solution would only be definite if the" satisfaction "was obtained as cheaply as possible, it being assumed that before the war given sums of money were laid out to the best advantage. This method would only be satisfactory if fairly close agreement was obtained as to the equality of the new with the old standard.
Another method has been used in the case of comparison of the cost of living in two places. In 1905 the Labour Department of the Board of Trade (United Kingdom) initiated inquiries about the cost of living in the United Kingdom, United States, France, Belgium and Germany, and obtained budgets of expenditure in each country; the results are published in the official papers Cd.3864, Cd.5609, Cd.4512, Cd.5065 and Cd.4032. A comparison was made between the cost of living in the United Kingdom and in each other country on a double basis, as follows: - it was found that an English housewife purchasing in 1909 in the United States a week's supply of food as customary in England would have spent 38% more in the first-named country, the ratio of the costs of living being on this basis loo: 138; on the other hand, an American housewife purchasing in England a week's supply of food as customary in America would have found her expenses reduced in the ratio 125: i oo (Cd.5609, pp. lxvi., lxvii.). If these ratios had been reciprocate, either would measure the difference in the cost of living (so far as food is concerned); as it is, their divergence illustrates the want of definiteness in the problem. Now it is quite possible to obtain in any country a current budget to be compared with a pre-war budget and the method just described can be applied. Thus, in the Journal of the Royal Statistical Society, May 1919, p. 344, details are given of the standard pre-war British budget and of the average of budgets collected by an official committee on the cost of living in the last year of the war, in which the standard of living had been modified and had fallen somewhat.
A housewife purchasing in 1918 the same qualities and quantities of food as in 1914 would have increased her expenditure in the ratio 1 00: 212, while if she had purchased in 1914 the same qualities and quantities as in 1918 the ratio of the earlier to the later expenditure would have been ioo: 202. Both these are possible measurements (the first being identical with case a above), and where the difference between them is so moderate an intermediate number, such as the arithmetic or geometric mean (which are nearly coincident), loo: 207 makes a plausible measurement of the change.
Another method, allied to that just described, gives perhaps the most practical solution, though its adequacy can hardly be proved from theoretic conditions. Obtain typical budgets of expenditure at two dates; compile a new or mean standard of quantities which item by item are the averages of the entries in the budgets; thus, if in one the consumption of 33 lb. of bread is stated, in the other 35 lb., enter 34 lb. in the mean standard; now find the cost of the mean standard at each date and take the ratio of these costs as the measurement of the change in the cost of living. In the example just used this ratio was found to be loo: 204. (On the methods formerly used for this problem, see Palgrave's Dictionary of Political Economy, vol. iii., article" Wages, Nominal and Real,"p. 640.) If all prices rose in the same ratio the methods now described would necessarily yield the same result; the need for choice arises from inequalities of increase, including the case where the goods are no longer in the market as one where the price is indefinitely great. Now if at one date purchases are made so as to maximize the satisfaction in the outlay of the week's housekeeping allowance, as we may reasonably assume, and prices rise irregularly, it is evident that somewhat less will be bought of the commodities which have risen most and more of those which have risen least if a maximum is still obtained, and that consequently the increase in the expenditure necessary to obtain the same satisfaction as before is less than the increase if exactly the same quantities had been purchased. For example, if oranges are doubled in price and bananas increased only by one-half, more bananas and fewer oranges will be purchased.
If with the notation used above we also write qi, q2, q3. .. for the quantities purchased at the second date, the measurement ob tained by using these quantities is q1131 + c12132 ' + Ig1P1 g2P2,+. .. ioo (say) instead of Q IPI Q2p2 + ' ' ' (as above) = I I 1 (say). If the QlPl + Q2P2 +..
100 small letters refer to a second place (instead of date), then as between England and America I 1 =138 in the illustration 1 2 =125. For two dates the method illustrated from expenditure on food in England gives 1 1 =212 and 12=202, and the suggested index number is 13 = EL +I 2) =207. The other method recommended is to take I (Q1 + qi)pi + ' 4_ X loo. It is easily shown 1(Q1 + q l) P? + z (Q2 + g 2) P 2 +.. y that I 4 is always intermediate between I 1 and 12, and by a more troublesome analysis that II is less than I I when prices in general are rising and quantities consumed of individual goods have increased or diminished according as their prices have risen more or less than the average as measured by I I; in fact I I - I 4 = I OO (PI Pi) (Qi - + (Q1+ qi) Pl+ (Q2+ g2)P2+ .. .
where i oor = I I, and the factors in each term of the numerator are both positive or both negative under the conditions named. Hence, I 4 satisfies many of the fundamental conditions of the measurement required. Bowley (Stat. Journal, loc. cit., p. 351) suggests as a measurement of the loss of satisfaction in the case of a falling standard the expression {(Qi_ i)Pi+(Qt_2) P 2+
1 Q1P1 -fQ2P2 +
/, the ratio of the cost of the decrease in quantity to that of the quantities at the first date, both valued at the prices of the first date; this method leads to I 2 as the index of the increase of cost of living, but it is not of general application for it does not give equal importance to the distribution of expenditure at both dates since 12 does not involve Qi, Q2
T. L. Bennett (" Theory of Measurement of Changes in Cost of Living,"Journal of the Royal Statistical Society, May 1920) carries the argument further by important steps. With the notation already used, he supposes that a housekeeper gradually changes her purchases from quantities Qi, Q2. .. at prices P 1, P2. .. to quantities qi, q2. .. at prices pi, p2.. ., the quantity of each commodity bought being related to its price by a law of demand. He then shows that the increase of expenditure, when the final is compared with the initial date, viz. e - E, is algebraically equal to X-+L, where X = 2 (Qi + q i) (p i - Pi) + 1(Q2 T q 2) (p 2 - P2) +
and L = z (q i - Qi) (pi +Pi) + 2 (q2 - Q2) (p2+ P2) -I-
.. and he identifies X as measuring the increased expenditure necessary to preserve the former standard of living and L as measuring increased satisfaction from increased consumption (or if L is negative a decrease).
This method gives a useful and simple test of the equivalence (as measured by satisfaction) of two budgets at different dates in the same country, for L should be zero, that is qi
2 (pi+P1) -+q2.2 (P2±P2) ±
.. should equal Qi
a (Pi +Pi) 4-Q2-1(P2+ P2) +
This test should be applied if the suggestion made above of constructing an equivalent budget for comparison is carried out.
If L is negative it would be necessary to add to expenditure e to make it equivalent to the earlier expenditure E, and Bennett, having regard to the changed purchasing power of money, suggests a somewhat complex and indefinite method of ascertaining the necessary amount; the index number for the cost of living may be written approximately loo X (e+LJ' To) / E, where I is chosen as one of the index numbers already written.
Case (d). - The problem with which many countries were faced in 1920 and 1921 was in reality not that of preserving a standard of living on the level of 1914, but of adapting themselves to a lower average standard, whatever the fortunes of favoured classes. This may be illustrated by the arrangement of the salaries of civil servants in England in Feb. 1920. At that date the official measurement (on method b ) of the increase in the cost of living over 1914 was 130%. The full increase of 130% was awarded to persons with a wage of 35s. weekly (f, 91 5s. per annum), 60% was added to the residue of salaries up to 200, and 45% to the residue of the salary. Thus a man whose salary was L400 on the pre-war basis received an addition of 2 738- (130% on L91 5s.=f1181, 60% on 108 15s.=Y654, 45% on £too = 90), about 68% in all. This increment was increased or decreased by one twenty-sixth part for every complete movement of 5 points in the official index number averaged over certain periods. It appears to have been assumed on the be regarded as the cost of maintaining the standard customary to the social or occupational class concerned at a given time and place. In this sense the cost of living of Chinese labourers is lower than that of the Americans, though they pay the same prices for commodities. When" cost of living "is used in this sense it should always be accompanied by a reference to the standard attained. Thus the British Committee on the Cost of Living in 1918 estimated the average expenditure of working-class families in 1914 and 1918 and at the same time reported on the change of standard. In some of the statistics quoted below a conception of this kind is involved in the figure.
UNITED KINGDOM (a) Cost of Food. - In the United Kingdom the basis of the official measurement of the cost of living is that of finding the cost of a standard budget of expenditure at various dates (see Labour Gazette, March 1920, p. 118, and Report on WorkingClass Rents and Retail Prices, Cd.6955 of 1913, pp. 299 seq.). The standard budget was obtained from a collection of 1,944 records of weekly expenditure made in 1904; the average weekly family expenditure was 36s. Iod., of this 22S. 6d. was spent on food, and of the food 18s. 6d. is accounted for in the standard used prior to the war. A somewhat altered basis was taken in 1914. Rice, tapioca, oatmeal, pork, coffee, cocoa, jam, treacle, marmalade, currants and raisins (the expenditure on all of which was about 2S. Id. in 1904) were omitted and fish and margarine added (an addition equivalent to 6d. in each case). It was assumed that, though prices had increased between 1904 and 1914, the relative expenditure (which alone enters into the computation) on the different commodities was unchanged; this assumption is too rigid but not unreasonable, and the facts otherwise known about price movements and consumption show that the error introduced is insignificant.
Relative importance being determined, the next step was to ascertain the movement of prices. Prior to 1914 the records were obtained exclusively for London, but it was shown (Cd. 6 955, pp. 2 99 and 306) that from 1907 to 1912 the average movement was very nearly the same in provincial towns as in London. From Aug. 1914 statements of prices were obtained for 650 towns and villages.
The index numbers of the cost of living, so far as food is concerned, were then obtained by the method b described above; prior to 1914, the year 1900 was taken as base and the prices then equated to loo; from the beginning of the war July 1914 was taken as base.
The index number is in the form loo X (Eiri--E2r2+
.) (E1--E2+. ..) where E 1, E2. are the expenditures on the separate commodities in the standard budget and r1, r 2. .. are the ratios of the prices at any particular time to the prices at the basic date. The values actually taken for the E's were as in Table I., being proportional to the expenditure.
TABLE I.
| Bread 50 Flour 20 | British meat: Beef | 24 | Milk Butter | 25 41 | Tea Coffee* | 22 2 | Sugar Jam* | 19 4 | Rice* 3 | Mutton | 12 | Eggs | 29 | Cocoa* | 4 | Treacle * | 2 | Tapioca* 1 | Pork* | 15 | Cheese | to | Marmalade* | 4 | Oatmeal* 5 | Imported meat: | Margarinef | to | Currants* | 3 | Potatoes 18 | Beef | 24 | Raisins* | 2 | Mutton | 12 | Bacon | 19 | - | Fish t | 9 | _ | _ | _ | Totals prior to 1914. .. 97 | 106 | 95 | 28 | 34 | 1914 and onwards ....88 | loo | 105 | 22 | 19 Grand totals: before 1914, 360; after, 334
,one hand that the expenses of the middle class had not increased so much as indicated by the index number based on workingclass expenditure, and on the other that the standard of living must be lowered - the higher the income the greater the fall. A similar scale was adopted at nearly the same date for railway officials. We are thus led to consider a conventional standard of living which changes from time to time. When there is no reference to a physiological minimum, the cost of living may There are certain weaknesses in the method. It is assumed without explicit evidence that expenditure on meat was in the proportion 2S. on beef to Is. on mutton, and that British and foreign meat were of equal importance, and the price ratios taken for meat are for four selected joints only; during the period 1915 to 1919, when the relative quantities available varied and relative prices were altered, this assumption affects the index numbers. The weight assigned to margarine is ar .e. bitrary. The number of eggs consumed (about 12 per household per week) is based on summer records and is no doubt higher than the average for the year. The resulting index numbers were as in Table II: TABLE II. Index numbers of retail food prices in United Kingdom. (London only prior to 1914.) Average for year unless otherwise stated.
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