The lower cost of living in China is often confused with a lower price of consumer goods. This Great Graphic from Economy Watch, shows that many consumer goods, particularly international brands, are more expensive in China. Economy Watch drew from data on three different web sites: e.weibo.com, East-West-Connect.com and sohu.com.
To understand why this is the case requires shedding light on the cost structure of good that consumer purchase. We have discussed this in terms of the good imported to the US and how 30-50% of the price American consumers pay is incurred locally for marketing, storage and transportation.
While many foreign brands have a cache, associated with higher status and prestige, there are economic reasons why China’s consumers pay more. It has to do with the cost of internal movement of goods in China.
The domestic cost structure, such as gasoline and tolls, boost the price of logistics. At nearly a fifth of GDP (18.4%), the cost of logistics in China are twice what they are in high income countries (9%). It costs more to ship goods from Guangzhou to Beijing than from Guangzhou to the US.
The significance of internally derived costs also points to a problem with purchasing power parity and its numerous derivatives, including the Big Mac index. Simply put, the price of internationally traded goods is often impacted by local costs.
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