A cost-of-living index is calculated from price data for goods and services in two or more cities. The cost of living in the base city is expressed as 100. The cost of living in destination cities is compared against this number, according to the Economist Intelligence Unit.
The easiest way to calculate a cost-of-living index is to simply select a group of goods and services for creating the index, apply data from a price survey to each type of good or service, add up the total for each city, and then compare the totals, as reported by the Economist Intelligence Unit. However, the problem with this method is that either of two cities can emerge as more expensive, depending on which city is used as the base.
For example, if London is the base city, with a score of 100, and New York is the destination city, with a score of 120, then the cost of living index for New York is 120. Under this scenario, New York is 20 percent more costly than London, as stated by the Economist Intelligence Unit.
Various calculation methods can be used to compute a cost-of-living index, and various types of numbers can be used for price data, including government statistics, numbers from privately commissioned studies and corporate estimates, according to the Economist Intelligence Unit. Differences in the calculation methods and types of price data used lead to differing results for a cost-of-living index.