I searched Google for information about what nations are the cheapest for travelers, and although there is a lot of interest about this topic on blogs and discussion forums, I found no good hard data on the internet. This is a bizarre lesion in the world’s collective knowledge (at least as it is revealed by Google) because it is easy to predict what countries are the cheapest to travel in for Americans using a bit of economic theory and readily available data.
The basic idea is that you want to go places where a dollar buys a lot of goods. The following map gives you an approximate value of how expensive each nation was in 2017 (Click on the link for an interactive version of the map):
The following table gives the numerical data underlying the map and the cheapest country in the world in 2017 was Egypt which is right next-door one of the most expensive, Israel. In Egypt, it only took 21 cents to buy a dollar’s worth of goods and services on average. That is like the whole country being on sale, almost 80% off! The very most expensive was Iceland where it took $1.32 to buy what normally costs only $1 in the US. The index says that 49 cents in Mexico buys as much as a dollar in the US which means that Mexico was approximately half price compared to travel in the US.
Note: The following table is very long, so you can click here to scroll to the end to read more.
|Country Name||2017 Travel Cost Index (World Bank Data)||2018 Travel Cost Index (October OECD Data)|
|Egypt, Arab Rep.||0.21|
|Iran, Islamic Rep.||0.26|
|Bosnia and Herzegovina||0.40|
|Trinidad and Tobago||0.51|
|Congo, Dem. Rep.||0.52|
|United Arab Emirates||0.55|
|Sao Tome and Principe||0.57|
|Central African Republic||0.58|
|Papua New Guinea||0.61|
|St. Vincent and the Grenadines||0.61|
|St. Kitts and Nevis||0.63|
|West Bank and Gaza||0.63|
|Antigua and Barbuda||0.64|
|Macao SAR, China||0.70|
|Hong Kong SAR, China||0.75|
|Micronesia, Fed. Sts.||0.88|
What is the Purchasing Power Parity (PPP) exchange rate and how is the Travel Cost Index calculated?
The purchasing power parity (PPP) exchange rate is simply what you get when you divide the prices of goods in one currency by the prices of the exact same goods in another currency. For example, suppose the only good that matters is the price of a hamburger (which is actually used to create the Big Mac PPP index). If a hamburger costs $2 in the US and €4 in Paris, then a dollar is worth €4/$2 = 2€/$. That means the purchasing power parity of a dollar is two euros. By itself, this tells us nothing about how expensive it is to visit Paris because it doesn’t tell how many euros you can actually buy with one dollar. That is the market exchange rate which is usually not the same as the PPP exchange rate. If the market exchange rate equals the PPP exchange rate, then the cost of travelling in Paris is exactly the same as the cost of travel in the US. When the two exchange rates differ, that tells you how much cheaper (or more expensive) another country will be.
The Travel Cost Index is the PPP exchange rate divided by the market exchange rate. For example, if the two exchange rates are equal, as in the above example, then 2€/$/2€/$=1 and both countries are equally expensive.
However, if the market exchange rate value of the dollar is more than the PPP exchange rate value, then Paris will be less expensive than America. For example, if one dollar buys 2.22 euros, then 2€/$/2.22€/$=0.9. This means that France is about 10% cheaper than the US and the above data happens to show that that is how much cheaper France was than the US in 2017.
What are flaws in the Travel Cost Index?
The Travel Cost Index is only an approximate estimate of relative price levels because, first of all, PPP doesn’t just focus on the kinds of things that tourists buy. It measures a much broader ‘basket’ of all goods and services, some of which, like “200 types of equipment goods and about 15 construction projects” are completely irrelevant to tourists whereas a lot of the things that are important to tourists like tour packages are probably not measured in the PPP index at all. The PPP index only includes 3,000 consumer goods and services are included, so it leaves out a lot of things, and the kinds of things tourists buy are poorly represented.
Some countries are going to be cheaper than the Travel Cost Index indicates because some places like Thailand have an extremely efficient tourism infrastructure which brings down prices for tourism-related purchases and other countries like Iraq (probably) have not developed efficient infrastructure and achieved economies of scale for handling visitors from around the world. Similarly, some regions in every country have cheaper prices for travelers than others and if you are in an expensive region, like New York City in the US, you’ll need a very different budget than you would need in a cheap region, like West Virginia. Because the PPP index shows average prices, that means that the prices in rural areas is going to typically be lower than the PPP index (at least for the kind of purchases that rural people routinely buy), and costs in large cities are typically going to be higher.
Secondly, no traveler can get the published market exchange rate because of foreign exchange transactions costs that usually average about 3% , so every country should be about 3% more expensive on average than the Travel Cost Index shows.
Thirdly, the World Bank data doesn’t agree with the OECD data and I’m not sure why. Obviously the OECD data is more up-to-date whereas the World Bank data is almost a year out of date, but that is easy to adjust for and the adjustments don’t eliminate the discrepancies. PPP data is always a bit out of date, and it is important to update the index with new price information as explained below.
PPP update formula
Just calculate how much any foreign exchange rate has changed (in percentage) and subtract it from how much higher their inflation rate has been compared to the US rate over the same time period. For example, if the foreign inflation rate has averaged 10% over the past year and the US inflation rate has been 2%, that means that their prices have gone up 8 percentage points more than in the US. Then if their exchange rate (the value of their currency per dollar) has gone up 5%, the net change in prices is 3%, meaning that their country is 3% more expensive than it was a year ago.
10% – 2% – 5% = 3%
10% = How much their prices rose
2% = How much American prices rose
5% = How much the exchange rate value of the dollar rose
In fact, this is how PPP is updated by professional economists most of the time. Because it is expensive to gather actual PPP prices in every nation in the world, and because we have inflation data which gives similar information, the baseline PPP data is ordinarily just updated with this formula.
Vox created a “Vacation Index” which merely used this calculation instead of using the overall PPP measurement shown in the above map and table data. Vox’s index showed how much cheaper a nation is now than it had been a year ago. That produces an interesting index as shown for May 2016 (below), but any change in the past twelve months is usually going to be very small relative to the Travel Cost Index shown above, although it is somewhat significant in rare examples like when countries suffer a major currency devaluation such as in Argentina and Russia at the top of the graph.
The Vox index in the graph just shows how much the Travel Cost Index changed over the past year in different countries. This is a poor measure of overall travel costs because it ignores the PPP baseline. For example, it shows the United Kingdom as being particularly cheap and Turkey as being quite expensive when the reality is just the opposite. This chart merely shows that the UK had gotten 3% cheaper than it had been the previous year and Turkey had just gotten 4% more expensive than it had been the previous year, but the UK started out a lot more expensive than Turkey (and has been for about a century) so the relatively small changes over the prior year weren’t significant relative to the baseline PPP. Despite falling prices in the UK and rising prices in Turkey, the UK still remained almost twice as expensive as Turkey overall according to World Bank data in the map and table above.
Of course, the index in my table is also imperfect for the reasons mentioned above, but it is the most comprehensive there is and the editors at VOX must have determined that their index isn’t very useful because they abandoned it and haven’t continued to update it with new data.
If you want to get even more wonkish…
Another interesting way to present this kind of data graphically can be seen on the following Gapminder graph. Again, you have to click on the link to make it really useful, but here is what you will see:
The nations that are lower than the 45-degree line like Saudi Arabia and most of the oil exporters are relatively cheap relative to the other countries that are nearby on the graph and the nations that are above the trend line like the red island nations are relatively expensive compared with other circles nearby on the graph although what is more difficult to see on this particular graph is the fact that poorer nations tend to be cheaper overall than richer nations mainly because labor is so much cheaper in poor nations.
In fact, developing countries usually have costs between 1/4 to 1/2 the rate in developed countries mainly because most production is non-tradeable. The biggest part of every economy are things that are too expensive to be shipped abroad like real estate and services like hair cuts and taxi rides so they are completely non-tradeable. Goods and services that are not tradeable are not subject to arbitrage and so the law of one price does not apply.
Generally tourists buy a lot of labor in hotels, restaurants, taxis, etc., and because wages are way lower in poor countries, services tend to be much cheaper because these are not tradeable goods.
For tradeable goods, the law of one price should apply in the long run in theory, but that theory doesn’t work very well in practice mainly due to the massive scale of financial flows which largely determine exchange rates and which have little to do with the spot price differentials of tradable goods.
According to the Bank for International Settlements, the foreign exchange market is by far the biggest market in the world in volume. It many times bigger than GDP or than turnover in equity markets.
The massive flows in foreign exchange speculation results in market exchange rates that can fluctuate much more wildly than any changes in the prices of tradeable goods, GDP, or anything else in the real economy. Large speculative deviations in market exchange rates from the long-run averages of fundamental measures can persist for years.
Other issues affect different prices too and that is how even tradeable goods like Ipads can sell for radically different prices around the world. According to the Ipad index, the price varied in 2013 from $473 in Malaysia, to over $1,000 in Argentina.