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.