20 March, 2019

Minimum wage of 2,200 € per month vs living on 2 € a day. What defines the world’s most contrasting economies?

Imagine you are sitting at your office desk and you decide that you want to take a trip to see the beautiful Swiss Alps and absorb the calm and tranquil air. What better place to do this than Zurich, Switzerland?  Your impulses take over, and after hovering your mouse over the little blue button for quite some time, you press “book it”.

After countless hours of traveling, you FINALLY get to your Air BNB at the crack of dawn. You look to the left, to the right, up and down and there are breathtaking mountains with light snow sprinkled on endless peaks that extend to forever in the distance. Life is good, the world is right, and YOU are ready! You spend your first day consuming all the Swiss chocolate, Swiss cheese and bread you could imagine, and before the day is done you realize you have spent 150 € in your first day there.

While the least expensive meal in Switzerland might cost you 25 €, 4,200 miles away in India you would pay only 1.20 € for the same meal.

So why do we see such price differences between different countries? Within this article we are going to be digging into the reasons as to why Switzerland is one of the most expensive countries in the world and why India is one of the most inexpensive. Why aren’t all prices the same in each country? What specific factors determine the price of a consumable item country? Let’s take a look.

Why Is Switzerland Expensive? Digging deeper into the most expensive country in the world.

1) Switzerland as an Island

Although there are many reasons why some countries are more expensive than others, let’s focus as to why Switzerland is so expensive. After all, isn’t it just another country nestled between three European Countries? It isn’t a tropical island like Bermuda where they must import all their products, so it can’t be that expensive right? Wrong. One of the first reasons Zurich is so expensive stems from the fact that Switzerland is not in the European Union (EU) like its neighbors.

Switzerland acts as its own “island” because it doesn’t have the import discounts of those in other countries in the EU, therefore making goods and services that are not produced in Switzerland expensive to import. Sometimes, locals and business owners send goods to Germany when ordering from other countries in the EU because it is cheaper to send goods from EU country to EU country.

2) The Farming Industry

The Switzerland government wants to protect the small Switzerland farming industry so the government imposed a high import tax on food from other countries. This skyrockets the price because there is already a higher tax on foreign goods because Switzerland is not a country in the EU.

Meat is especially pricey in Switzerland, sometimes costing over 100 € for a cut of beef. Many Swiss farmers have small farms, which makes it difficult for them to stay above the poverty line even though the government pays many farmers a 50% subsidy of their profits.  Because of the small farming industry, the farm produce in Switzerland is produced at high costs, making the food more expensive.

3) Low taxes

High prices in Switzerland can be attributed to the low taxes that locals pay. On average, the locals take home 83% of their salary therefore leaving only 17% going to taxes. The low taxes mean that the people in Switzerland have more money in their pockets to be able to spend on day to day goods and services such as their own healthcare, expensive grocery bills, and overpriced clothing! Countries such as Germany only take home 60% of their salary, however such countries have more benefits and lower prices, which isn’t the case in Switzerland.

Now that we know about the most expensive country in the world, let’s look at one of the least expensive countries in the world: India.

Prices in India are significantly lower than most other countries. To put things into perspective, in some cities in India, hotel rooms can get as low as 1.50 € a night. A three-bedroom apartment on average is 202 € a month versus 2,035 € in Switzerland. Rent in India is 72.5% lower than that of Spain’s rent costs, and 88% lower than Switzerland’s rent costs. Unlike Zurich, a meal for one person is typically only 1 € to 2 € and a large coke is only .37 €. Now why are prices in India significantly lower than those such as Switzerland and Spain?

Why is India Inexpensive? How can the average person live under 2 € a day?

1) Raw Materials

It is shown that the price of raw materials in India is cheap. Clothing in India is manufactured in India, so they don’t have to import much from other countries. Also, Indian food is produced and consumed in India which allows for a lower food price. In the past five years, the prices of raw materials have been decreasing immensely which reduces business costs which then reduces prices.

2) Poverty

Living in a cheap country has its own prices to pay. India has the third highest poverty rate in the world coming in after Congo and Nigeria. In order to settle for the cheap prices in India, one has to settle for a cheap way of living. “68.8% of the Indian population lives on less than 2 € a day. Over 30% even live off less than 1.25 € per day available – which is considered the poverty level of India” (Staufenberg). In order to keep the economy stable in a country with such poverty, the companies need to keep the prices low, so that their consumers are willing and able to continue to purchase their product.

3) Lower working Wages

Since India is known to be a country of high population and high poverty, that means that people will be willing to work for a lower wage. People are excited about any wage they can get, therefore accepting a lower salary which gives them less money to spend in the economy. So why don’t these chefs, maids, and cab drivers in poor countries just move to a country in which they would make significantly more money? Well, the answer is immigration laws. Unless the country is a part of the EU, entering a new country, legally, can be costly so most people would rather stay in their home countries where prices are relative to the salary they make. These immigration laws and low wages keep the prices of goods and services low.

Conclusion

The average salary in Zurich is about 71,000 € compared to an Indian average salary of less than 1,600 €. To put this into perspective, in Switzerland, a person is considered under the poverty line if they make under 41,820 € a year. This would mean that India’s salary, as well as Spain’s average salary of 23,890 € a year would be significantly below the poverty line in Switzerland.

GDP explains most of the differences between India’s and Switzerland’s economies. However, we must not forget the contribution of factors like tariffs, net exports, and a preference for consumption of local products.

As a consumer, it is important to understand the differences in prices in other countries so that you are prepared next time you step foot in one of the most expensive countries in the world! So next time you reach in your pockets for money to purchase a morning cup of coffee in India, be prepared to pay about ten times that much in Zurich. Oh… and don’t forget the mountaintop views as you sip that glorious morning coffee!

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