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Why is the UK so expensive?
A loyal MR reader, Erik Alberts, writes:
I've made several trips to the UK in the past few months in preparation and it amazes me how much more things cost there (in London) then here in California. What I'm trying to understand is why. I realize that some things like gasoline cost more in the UK due to taxes. But for other things, it appears that prices in the UK are 40 to 50% higher. How would you explain this?
Here are a few examples:1. Apple iTunes - costs $0.99 per download in the US, costs $1.47 (0.79 pounds at 1.8594 pounds/$) in the UK. Why should downloading a song in the UK cost 48% more when on the internet you can just download them off the US site?I realize that higher taxes and higher labor costs may be factors (although at my company UK labor is cheaper than it is in California), but I find it difficult to believe that this would explain a 50% difference. Could this be a sign of currency imbalance like the big mac index, a supply and demand issue, or are UK consumers simply used to paying more?
I have wondered the same about Switzerland. The standard explanation is that expensive countries are extremely productive with their tradables (North Sea oil and London finance?). That appreciates their exchange rates and renders non-tradables quite dear. This is the flip side of cheap barbers and prostitutes in Thailand. But are the Brits really so productive? If so, why can't they get both hot and cold water coming out of the same tap? And aren't some of the expensive goods tradables rather than non-tradables?
One factor for sure is that American retailing is the most efficient and most productive in the world. Perhaps the Brits are especially inept in this regard.
A further factor may be that foreigners, even those who are considering moving, sample British prices in biased fashion. We see lots of hotel rooms, cab rides, and restaurants. Fish and chips is still pretty cheap outside of London. As for Marmite I could not say, but that is exactly the point. Your preferred consumption basket will always look expensive in another country; just try getting Ocean Spray grapefruit juice in Western Samoa.
Your thoughts?
Posted by Tyler Cowen on July 26, 2006 at 01:27 AM in Economics | Permalink
Comments
Some of the difference would be caused by VAT. The UK has VAT rate of 17.5%.
Posted by: James Newton-King at Jul 26, 2006 2:29:47 AM
The reason is simple - firms have a policy of charging more (preiums of 40-60%) in the smaller (relative to the US) markets even when the transaction costs do not justify such a premium. The Times had a useful series of articles about 3 years ago on these issues. Firms use differential pricing models throughout the EU and UK so it was cheaper to buy Levi's in Spain than in the UK. Sometimes the interet can overcome these proces differences but in others firms create special barriers. For instance, DVD coding also means that DVDs bought in the US (region 1) don't play in the UK (region 2).
Posted by: andrew merrifield at Jul 26, 2006 2:31:56 AM
Exchange rates are more flexible than goods prices.
Alex
Posted by: Alex Tabarrok at Jul 26, 2006 2:39:51 AM
I've seen the same thing in China: foreigners think China's expensive, since they are almost always using monstrously expensive goods and services. But once you leave the five-star zone, things get vastly cheaper.
OTOH, Ikea price differences are odd. The Chinese stuff Ikea sells comes from the same massive mills in Guangzhou whether sold in UK or US. The VAT mentioned above may be an issue, especially since (as far as I know) VAT internalizes prices, while American sales taxes don't show up in list prices but are charged at the register.
Posted by: Foobarista at Jul 26, 2006 2:41:40 AM
Hmm...the Ikea UK Website quotes the "Bjursta" table at GBP 185, which at current exchange rates is roughly USD 341 (GBP 1 = USD 1.8409, according to Bloomberg). The Ikea US Website quotes the "Bjursta" table at USD 349. It's not exactly the Law of One Price, but I'd say that PPP more or less obtains. Or am I missing something?
Posted by: cbooker at Jul 26, 2006 2:44:01 AM
I also found the uk expensive but I don't think it is just efficient retailing. Walmart in Leeds has food prices 40 to 50% more than in US. A whopper at burger king is 3 pounds. Travelodge is a minimum of 46 pounds a night, and a lot more in london. New cars however are about the same as US. I would also like to understand the difference.
Posted by: joan at Jul 26, 2006 2:48:24 AM
Erik,
For any given product, the profit-maximizing price is a function of the shape of the demand curve faced by the firm (possibly modified by competition), and forward-looking marginal cost. To the extent that the UK has a lower intensity of competition and a lower population that can be profitably serviced at lower prices, you would expect the resultant prices of many goods to be higher.
Regards, Don
Posted by: Don Lloyd at Jul 26, 2006 2:58:10 AM
Rents are higher in the UK? (To retail most things you need a retail outlet.)
Posted by: Mark at Jul 26, 2006 3:49:31 AM
Aren't their labor costs much higher, especially for low-end labor like retail?
Aren't they the consequence of the "if you restrict labor supply you raise the price of consumer goods" statement?
Posted by: BillWallace at Jul 26, 2006 3:56:35 AM
I think Mark has the answer: property prices and rents are high in the UK.
So hotel and guest house accommodation rates are exorbitant, though the prices of less property-intensive goods like computers and electronic stuff don't appear high to me. Nor are clothes in the UK
very expensive, except for the top-end stuff. Why are UK property prices so
high? High population density, (perhaps necessarily) restrictive property building regulations and favourable tax treatment of homes are likely reasons.
Posted by: Ronnie Horesh at Jul 26, 2006 4:12:37 AM
A minimum wage of £5.05ph (about $9.34) in the UK and US Federal Minimum wage at $5.15 may have something to do with it. Also, land prices are much higher in the UK as we're a smaller place, so property rental is high. We're also pretty used to paying high prices for services as standard - such as hotels, eating out, etc. This is one of the reasons we can't fathom out why on earth you Americans tip everyone in the service industry!
Oh, and it's interesting to note that some comments will be skewed towards 'Why is London so expensive'. I live in the centre of London and stuff is very dear here. However, near my mother-in-law's place in Wales, I feel like I'm in a SE Asian economy and live like a king.
Incidentally, the great thing about living in London is that 'airport prices' (the markup each outlet whacks on things in airport departure lounges) start to seem reasonable.
Posted by: Ross Parker at Jul 26, 2006 4:16:42 AM
UK is much more expensive than US for a typical consumption basket, not just for an expatriate or tourist ones. And that applies to the country as a whole, not just to finance-hyped London.
I think there are several factors at work:
1) The supermarkets are quite efficient and drove the prices down on many goods. But the local counsils did not issue new permissions for large supermarket sites for several decades. Thus, any existing supermarket site is a very valuable asset and the prices have to reflect that.
2) Same applies to housing. It is very hard to get council permission to develop any farmland. So the median family house price in, say, Whales is about £150,000. These are much smaller houses than in US and Whales is a region that receives EU assitance as one of 10% poorest EU regions!
3) In New York, eating out is cheap because everybody employs illegal immigrants. In London, similar outlets usually do not do that. So the minimum take away bill is around $10.
Posted by: Mike at Jul 26, 2006 4:20:36 AM
Note that London in particular has had a property boom this year (again): mean house prices in Chelsea are up to 1400 GBP (i.e., $2600) per square foot. Look around at wherever you live and think about that.
Posted by: sammler at Jul 26, 2006 4:50:45 AM
I find Sweden generally expensive, too. I go back and forth from the US and Sweden, and all my staples go in one direction: sugarless gum, shave cream, Zip-lock bags, ibuprofen, DVDs, you-name-it purchased at Costco or Office Depot in Virginia and delivered to Stockholm for family there. There are some bigbox bulk stores around the suburbs of Stockholm, but not as cheap. Besides taxes, I wonder if part of the problem in Sweden (and UK) is that people don't drive as much, so retail competition much less. Also, people live in smaller quarters, and lack the space for a year's supply of toilet paper or ketchup. Also, in Sweden people lack the wisdom to break the law, driving up costs, particularly important for restaurants, household services, etc.
Posted by: Dan Klein at Jul 26, 2006 5:19:10 AM
I live in London. Amongst those of my friends who travel abroad frequently it has become something of a joke that retail goods - particularly electronics - are sold for the same headline figure in the US as in the UK - just with a dollar sign in front.
House prices are high in London and so a certain amount of inflation is expected in London. That clearly translates into food and drink prices: a pint of beer costs £3.20 in central London, and about £2 in Newcastle, a much poorer city in the north of England.
But brand-name goods - electronics, designer clothes, and so on - tend to cost the same across the country, and they tend to be of the order of 30-40% more expensive than in the United States or Japan. While all of the arguments that people have been suggesting about house prices and illegal immigrants make sense if you only compare the UK to the US, they make less sense if you compare the UK to Japan.
Posted by: Matt at Jul 26, 2006 5:43:18 AM
Not everything is more expensive in the UK.
Good tea seems to be much cheaper in the UK--a box of 40 Whittards tea bags is about $3. Similar quality tea in the US is about $5-6 per box.
Food products that are "natural" (aka preservative-free or organic) also seem to be cheaper in the UK. I think this might be because they're still sorta seen as specialty items in the US and therefore have a higher markup, whereas they're more standard/mainstream in the UK. Since "natural" foods are more standard in the UK, food still ends up costing more than the US where most people buy the cheap heavily processed stuff pumped with preservatives, but that's not necessarily a bad thing--for the same amount of money, you'll eat less but healthier (I lost 10 pounds [weight] in 1 month because of it!).
I think my wife said Birkenstocks were a lot cheaper in the UK too. Maybe these are more expensive in the US because of import tariffs?
Posted by: peter at Jul 26, 2006 5:53:25 AM
Being not an economist, I can only guess here, but it has something to do with currencies and exchange rates. Taxes and subsidies might be understandable in the case of the UK, but not in Switzerland. I am often buying things in Switzerland and go to BAsel over the weekend and I also must conclude that NOT everything is expensive. F.e. if you just buy gasoline you have one big times, because in Germany it is too expensive.
On the other side, it is a highly specialized country with a high standard of living, perhaps this also contributes (due to quality) to high wages and high costs.
The UK and Switzerland are two countries which haven't accepted the Euro, therefore to compare prices is difficult...
Posted by: Max at Jul 26, 2006 6:24:25 AM
1) My daughter finds London expensive compared to "home", which is a 45 minute train journey away.
2) Property prices probably do matter a great deal.
3) But there is presumably a residual effect left that I can't explain.
Posted by: dearieme at Jul 26, 2006 7:35:24 AM
My perspective is that of a Canadian living in London--and Canadians and Aussies are even more likely to complain about London prices than Americans! Obviously tourist goods are expensive everywhere, but once you get beyond that I think that expensive land is the key factor. My accomodation in London costs at least twice what similar accomodation would be in Toronto (let alone a smaller Canadian city, where property is at least twice as expensive as in a small English city). Population density coupled with the severe restrictions on urban sprawl must be largely responsible for this. On the other hand, clothing, etc, costs the about the same (there is sticker shock because sales taxes are generally included in prices here rather than being added at the checkout, but on most goods the total sales tax is equivalent). Most things at the supermarket are about what you would pay in Canada, but restaurant meals are much more expensive, which is probably a function of high land and labour costs (at any decent place in central London the waiters are paid well above the national minimum wage-- and this is with free immigration from Poland!). I'm not certain you can say that US retailing is more efficient than in the UK: Asda, a supermarket chain, is owned by Wal-mart and applies their practices, while certain UK chains (e.g., Tesco) are world leaders at lean distribution systems and have even acquired supermarkets all over the globe. Supermarket prepared foods (e.g., hot cooked chickens you can take home) are roughly the same price as in Canada, despite higher labour costs.
Posted by: Andrew Smith at Jul 26, 2006 7:54:45 AM
Great thread guys!
Posted by: Chris Meisenzahl at Jul 26, 2006 8:13:23 AM
Though perhaps a bit trivial, Tesco brand chocolate mousse is half the price of comparable American chocolate pudding. At least my dessert was inexpensive!
Posted by: Frank DiTraglia at Jul 26, 2006 9:11:31 AM
I can't address the Canad/UK difference, but the US/UK difference is far greater than can be explained by the VAT--the highest sales tax in America is (was, anyway) Lousiana at 11%. My city is ca. 10%, and goods are far, far, far, far, far more expensive in London than New York (the most expensive city in America). I'm one of a bunch of young American journalists who have been temporarily assigned to the London office, and while all of us enjoyed our time there, we all found it to be a financial disaster. Part of that was, of course, the exchange rate, but even tradables are extremely expensive. Clothes, electronics, housewares--it cost me almost 200 quid to put together a VERY modest assortment of kitchen supplies. I had a side function smuggling electronics for my coworkers from my trips home. THe UK imports most of its food--food costs twice as much as it would in my urban supermarket. (Only exceptions I could find: dairy products and sugar.) I don't know where you shop for organics, but in London non-organic produce cost more than they do at the Whole Foods in the Time Warner Centre.
I'd plump for smaller market size, inefficient supply chain, and real estate. And, of course, just sheer bloody-mindedness.
Posted by: Jane Galt at Jul 26, 2006 9:17:29 AM
What about the fact that Apple alone does not set prices, but must negotiate with local license holders? That's why you can't download songs from the US iTunes store in Britain, and vice versa. These prices are not set by managers but as the result of hard-fought legal negotiations.
The British counterpart to the RIAA may simply be much more effective at price-fixing than they are here.
Posted by: Sandy at Jul 26, 2006 9:51:43 AM
iTunes is probably a bad example, since 1 is the magic number in pricing. Apparently demand curves are discontinuous, and even nonmonotonic, around P=$1.00.
Posted by: Blar at Jul 26, 2006 10:26:29 AM
Another example of Brits paying lower prices is textbooks. I used to buy many of my textbooks via Amazon.co.uk AND pay international freight and they were still cheaper.
Two quick examples:
1. Mankiw's 5th edition of Microeconomics
£40.99 (about $75-76 at market exchange rates) vs. $125.96 on Amazon.com
2. Mankiw's 3rd edition of Principles of Microeconomics paperback w/Xtra
£31.34 (about $58 at market exchange rates) vs. $106.95 on Amazon.com
All said, I could still save about $30 per book, even with paying for 2-day delivery.
Posted by: Dan Kahn at Jul 26, 2006 10:35:08 AM
