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U.S. Department of State January 2000 Quarterly Report Technical Notes Introduction | Living Costs Abroad | Quarters Allowances | Hardship Differentials

Part A - The Computation of Indexes of Living Costs Abroad Indexes of living costs abroad, as computed by the Office of Allowances of the U.S. Department of State, measure the cost in dollars of goods and services (excluding housing and education) purchased by Americans at foreign posts compared with the cost of comparable goods and services purchased in the Washington, D.C. area. The indexes are computed for use in establishing post (cost-of-living) allowances for American employees stationed at foreign posts where the cost of living is significantly higher than in the Washington, D.C. area. The post allowance covers most living expenses other than housing (quarters) and children's education, which are covered by separate allowances. The Office of Allowances computes separate indexes for privately employed Americans and for government employees. The latter indexes take into consideration prices of goods imported to a post and price advantages available only to U.S. Government employees. The local index computed for private American employees excludes these special factors. Indexes of living costs abroad are published for approximately 180 locations. For most countries, indexes are computed for only one location, usually the capital city. In countries where similar cost levels have been reported for all posts, only one post may be required to submit regular price reports. In addition, in countries where the government does not pay a post allowance, usually one post submits regular reports even though intercity differences in living costs could be significant. Indexes are computed for more than one post in those countries where the government pays a post allowance and where there are significant differences in living costs among cities where government employees are assigned. Limitations of Data The indexes are place-to-place comparisons at specific times. Changes in the indexes from one date to another reflect changes in prices at the foreign post relative to price changes in Washington, D.C., and, if applicable, changes in the currency exchange rate. They may also reflect some living pattern changes at the foreign post. Therefore, the indexes cannot be used for measuring cost changes over time at a foreign post. Also, the indexes are not appropriate for comparing living costs of Americans in the United States with the living costs of nationals of a foreign country. The indexes reflect only the expenditure pattern of American families. Living costs for foreign nationals reflect their own expenditure patterns, which usually are not similar to the average American pattern because of differences in average income levels and living conditions. The Retail Price Schedule Survey The indexes of living costs abroad are calculated on the basis of price data collected at foreign posts using a standard Retail Price Schedule and data similarly reported by the Bureau of Labor Statistics for the Washington, D.C. area. Price surveys are conducted annually in countries where government employees currently receive a post allowance. In countries where government employees do not currently receive a post allowance, price surveys may be conducted less frequently. Surveys are scheduled to be completed in a given month of the year. The actual survey month may vary due to local conditions. Posts may submit voluntary or interim surveys whenever circumstances indicate a major change in living costs. Whenever possible, the government employees selected to conduct the price surveys have had previous experience in economic sampling and survey techniques. They are provided general survey instructions in the Retail Price Schedule Handbook and also receive special directions from the Office of Allowances concerning pricing problems at their specific posts. The survey is designed to reflect living costs for a typical government civilian employee abroad with an annual salary in January 2000 of approximately $44,500 and two to three dependents. The survey officers must be familiar with the retail outlets and types of goods and services generally used by the typical American family at the post. Employees at foreign posts periodically complete a Living Pattern Questionnaire in order to identify the retail outlets most frequently used and the relative importance of other supply sources--special government facilities, goods brought to the post, and subsequent imports from the United States and other countries. The questionnaire also provides data on food consumption patterns, use of local available transportation, and use of domestic help abroad. Prices Used in Index Calculations The Retail Price Schedule includes prices for more than 120 goods and services in the following expenditure categories: food at home, food away from home, alcohol and tobacco, clothing, personal care, medical care, household furnishings and operations, household services (domestic help), transportation (public transportation and automobile operation), and recreation. The items priced have been carefully selected to represent a wide range of goods and services in each expenditure category and to satisfy the following criteria: (1) The items should be easy to identify and unambiguous; (2) To the extent practical, the items should be available worldwide; (3) For different parts of the world, the items should have a "common use" rather than a particular specification; (4) The items should be of significant importance in the average expenditure pattern of Americans, but not a type of item covered by other overseas allowances; (5) Each item should serve as a reasonable price level indicator of related items; and (6) In general, the items should be a type for which the standard deviation of prices is relatively narrow. Prices are not collected for automobiles, even though auto purchase is covered by the indexes, because of difficulties in surveying auto prices and in determining resale values and foreign depreciation rates. Instead, an automobile cost ratio of 100 is used to represent auto purchase costs abroad. In effect, it is assumed that either auto purchases are made in the United States for shipment abroad or that their cost is neutral--neither increasing nor decreasing the relative level of overall living costs abroad. Private organizations concerned about the treatment of automobile purchase costs can adjust the local index to eliminate the effect of this assumption. This may be done by using the following conversion factor: Auto Purchase = 100 = 1.095 Conversion Factor (100.0-8.7) This conversion factor of 1.095 times the amount by which the local index is above 100 will show the amount by which living costs exceed those of Washington, D.C. without the assumption about U.S. auto purchases. (The 8.7 in the formula represents the portion of the index representing auto purchase expenses by families in the Washington, D.C. area.) Example: Local Index = 160 1.095 x (160 - 100) = 65.7 Adjusted Local Index = 165.7 Foreign prices are also not collected for medical insurance or vacation expenses in the United States. For medical insurance, it is assumed that coverage is obtained at U.S. costs or at comparable costs abroad. A similar cost ratio of 100 is used to represent vacation lodging and meal expenses in the U.S. For most items, prices are collected at two types of retail outlets--the most frequently used outlet and the second most used outlet. Prices are collected for items commonly purchased by Americans at the post that meet the specifications or general descriptions in the Retail Price Schedule Handbook. In each outlet, three prices are generally collected for each item--the typical price for the specific item most frequently purchased by Americans; the substitute price for an item most often purchased as a second choice, whether a more or less expensive item or a different brand with an identical price; and the economy price for the least expensive item suitable for use by Americans at the post. The prices collected are all retail and include, where applicable, any local sales taxes and special discounts for cash purchases. Survey officers are asked to provide descriptions of the items priced and retail outlets visited, so that the Office of Allowances can evaluate the prices reported. When unusual changes are spotted by the Office of Allowances, the survey officer may be asked to provide additional survey information. For use in computing the U.S. Government indexes, prices are also collected at special purchase facilities such as commissaries and post exchanges. In addition, prices and shipping costs are reported for items imported to the post by government employees. However, these special prices are not used to compute the local indexes for private Americans. Relative and Index Calculations The Department of State computes four measures of living costs for each post--the local relative, the local index, the U.S. Government relative, and the U.S. Government index. The local index is computed solely for use by private organizations, while the U.S. Government index is used to establish post (cost-of-living) allowances for Federal employees. The basic Washington, D.C. expenditure weights for major expenditure categories in 1994 and 1999 are shown in the following tabulation: 1994 1999 Expenditure Category Weights Weights Food at home 12.1 13.9 Food away from home 9.5 12.2 Alcohol and Tobacco 4.8 3.5 Clothing 7.1 7.4 Personal Care 2.8 3.9 Medical Care 9.6 9.1 Household Furnishings and Operations 10.0 7.5 Domestic Service 2.5 1.5 Transportation 16.4 15.0 Recreation 13.6 17.3 Auto purchase 11.6 8.7 Total expenditures 100.0 100.0 The 1999 weights were derived from Bureau of Labor Statistics Consumer Expenditure Survey Data for the Washington, D.C. area in 1997. They will be used to compute relatives and indexes based on retail price surveys that are processed after January 1999. To compute the relatives and indexes, the average price of each item on the Retail Price Schedule for the foreign post is converted into U.S. dollars using the prevailing foreign currency exchange rate. The foreign price is then divided by the average price of the corresponding item on the Washington, D.C. schedule to obtain a ratio of the foreign price to the Washington, D.C. price. The item ratios are then averaged into subcategories (example: seafood subcategory includes fresh and canned fish and coffee subcategory includes ground and instant coffee item ratios). The subcategories are weighted by the relative importance of the expenditures they represent to compute major expenditure category cost ratios and the overall relative and index comparisons. Local Relative and Local Index The local relative is a comparison of the prices of goods and services at the foreign post and in Washington, D.C., with the price ratios weighted by the expenditure pattern of the family living in the Washington, D.C. area. The resulting local relative is a comparison of price levels but not the cost of living abroad. The local index is a comparison of prices at the foreign post and in Washington, D.C., with the price ratios weighted by the expenditure pattern of American employees living at the foreign post. It is a measure of the cost of living for Americans at the foreign post compared with the cost of living in the Washington, D.C. area. The local index is appropriate for business firms and other private organizations establishing cost-of-living allowances for American employees stationed abroad. For the local relative and local indexes, it is assumed that all goods and services are purchased on the foreign local market, except for automobiles, medical insurance, vacation expenditures, and furniture. Washington, D.C. area prices are used for these items that are often purchased in the United States or another country and carried to a post. These items may not be available in the foreign country or the items that are available would not be generally purchased by an American family. Information on purchases outside the country is obtained from the Living Pattern Questionnaire. Non-local purchases account for approximately 15 percent of the Washington, D.C. area expenditures, with about 9 percent for automobile purchase, 6 percent for household furnishings, medical insurance, and vacations outside the foreign country of assignment. Foreign Expenditure Weights To obtain foreign post expenditure weights, the basic expenditure pattern weights for the Washington, D.C. area are adjusted to reflect necessary modifications in consumption made by Americans living abroad. For some posts, weights for major expenditure categories are increased to account for additional food expenditures due to spoilage from humid climate or unsanitary handling, additional clothing expenditures due to climate or harsh cleaning methods, and the need to employ household help. These weight adjustments increase the base expenditure weights so that they total more than 100 index points. This increase over the Washington, D.C. base weight of 100 will generally cause the local and U.S. Government indexes to be higher than the relative comparisons. The weights within some expenditure categories of the indexes are adjusted to reflect substitutions made by American at the foreign post--for example, among different types of food items or between varying means of local transportation. The resulting local and government indexes may be lower than the relatives when these substitutions represent less costly alternatives that are not fully offset by other foreign living pattern changes. Information on the American expenditure pattern abroad is obtained from the Living Pattern Questionnaire and the Retail Price Schedule. U.S. Government Relative and U.S. Government Index The U.S. Government relative differs from the local relative in that it includes prices of goods imported to the post. Moreover, it reflects price advantages available only to Federal employees. These advantages include, but are not limited to, the right to use special facilities such as commissaries and post exchanges, the right to purchase certain goods tax or duty free, and goods and services such as household furnishings and medical care provided without charge. Like the local relative, the U.S. Government relative is a comparison of price levels and not a measure of living costs abroad because the expenditure weights reflect only the Washington, D.C. area living pattern. The U.S. Government index differs from the local index in that it reflects the cost of goods imported to the post and price advantages available only to Federal employees. Like the local index, the expenditure pattern of American employees at the foreign post is used to weight the price ratios. The U.S. Government index is used to compute post allowances for Federal civilian employees stationed abroad. It may also be suitable for use by some U.S. Government contractors. Post allowance levels for Federal civilian employees are published in Section 920 of the U.S. Department of State Standardized Regulations (Government Civilians, Foreign Areas). --The U.S. Government index is almost always lower than the local index because of the special advantages available to Federal employees. The U.S. Government index may be higher than the local index at a few posts because many goods not available locally are imported at higher prices than substitute local goods. When the U.S. Government index is higher than the local index, it is probably the more appropriate measure of living costs for nongovernment personnel. In such cases, however, the U.S. Government index may not fully reflect costs for nongovernment employees because of the special advantages available only to government personnel. --INDEXES OF LIVING COSTS ABROAD Adjustment for Exchange Rate Changes Department of State indexes of living costs abroad are computed at the currency exchange rate in effect as of the date of survey or index computation. Salaries and cost-of-living allowances for Americans employed abroad are generally established in U.S. dollars. For this reason, periodic allowance revisions for currency fluctuations are usually necessary to provide employees with the same purchasing power until new survey results are available and published. New survey indexes will reflect inflation abroad and in Washington, D.C., as well as more current exchange rate data. Foreign currency exchange rates are reviewed regularly by the Office of Allowances. When the exchange rate for a country has changed enough to alter the government post allowance, the U.S. Government index is recomputed and the post allowance appropriately revised. The Department of State does not publish these interim U.S. Government indexes or any comparable local index adjustments. Current post allowance levels for Federal civilian employees are published in Section 920 of the Department of State Standardized Regulations (Government Civilians, Foreign Areas). All indexes in Table 1 are original survey indexes computed by the Office of Allowances on the basis of Retail Price Schedule submissions. The local index can be recomputed to approximate the effects of a new exchange rate by holding constant the 15 percentage points of the local index that represent consumer expenditures outside the foreign country of assignment. These items include some vacation expenses, automobile purchase, medical insurance, and household furnishings. The suggested recomputation method limits the exchange rate adjustment to those expenditures typically made in local currency. The following formula can be used to show approximately what the local index would have been at the original survey date had all prices been converted to U.S. dollars at the new exchange rate: Suggested formula: New local index = 15+ (local index-15) x (local exchange rate / new exchange rate) Example: The January 2000 local index for Canberra is 121, at the exchange rate of Australian Dollar 1.57. The following calculations would be performed to recompute this index to Australian Dollar 1.61:   New Canberra  Index= 15+    (121-15) x 1.57/1.61     = 106 (121-15)     = x 0.975 (1.57/1.61 )     = 103 (106 x 0.975)     = 15 + (106 x 0.975)     = 15 + 103   at Australian Dollar 1.61 = 118 For posts in countries with very high rates of inflation, allowances may not warrant a reduction for currency exchange rate changes. However, a substantial devaluation may require some interim allowance adjustment until a new price survey is received and reviewed. The U.S. Government index cannot be recomputed using this simple formula because the government index generally reflects nonlocal currency purchases to a greater extent, and these costs must be held constant when adjusting for new exchange rates. The Office of Allowances recomputes the U.S. Government index by determining the exact proportion of total expenditures that are made in local currency and adjusting only that amount for the change in exchange rates. The resulting U.S. Government allowance levels are published in the Department of State Standardized Regulations (Government Civilians, Foreign Areas) every 4 weeks. A complete and accurate interim allowance revision would require an index adjustment for: (1) the new exchange rate; (2) the probable effect of the revaluation on prices of imported goods purchased locally by Americans and on American purchasing patterns; and (3) price changes at the foreign post relative to price changes in Washington, D.C., since the last survey. The full effects of a currency revaluation are not immediately apparent and may not be known for several months. Furthermore, correction for relative price changes since the previous survey date cannot be made easily. Using the relative trends in national Consumer Price Indexes can produce an interim adjusted index significantly at variance with new survey results because survey items, expenditure weights, and retail outlets sampled for the national Consumer Price Index are not usually comparable to those for the American living cost measures. Under these circumstances, there are no truly reliable interim indexes of living costs until the foreign post completes a new Retail Price Schedule and the Office of Allowances computes new indexes. The Payment of Cost-of-Living Allowances The U.S. Government pays a cost-of-living allowance to its American civilian employees at foreign locations where the post allowance index is 103 or above. The post allowance is calculated by applying the index to each employee's spendable income. Spendable income is defined by the Department of State as that portion of base salary available to an employee for the purchase of food, household operations, home furnishings and equipment (including telephone), apparel, transportation (including auto operations and purchase), health care, entertainment, personal care items, reading material, education, alcohol, tobacco, and miscellaneous goods and services. To avoid minor adjustments in allowance payments, post allowance indexes are grouped into ranges, and the percentages to be applied to spendable income are based on the approximate midpoints of each index range. The percents applied to spendable income used by the government are shown in Table A. The following example illustrates the necessary steps to determine a cost-of-living allowance for a family of three with an annual salary of $50,000, at a location with a local index of 158 (Washington, D.C. = 100): (1) Percent to be applied to spendable income is 60 percent (Table A). (2) Spendable income for a family of three at the $50,000 salary level is $24,600 (Table B). (3) Annual cost-of-living allowance is 60 percent times $24,600 = $14,760. Table A: Local Cost-of-Living Index and Percent Applied to Spendable Income to Determine Post Allowance

Local Index	Percent applied to spendable income	Local Index	Percent applied to spendable income
103-107	5	166-175	70
108-112	10	176-185	80
113-117	15	186-195	90
118-122	20	196-205	100
123-127	25	206-215	110
128-132	30	216-225	120
133-137	35	226-235	130
138-145	42	236-245	140
146-155	50	246-255	150
156-165	60	256-265	160

The spendable income table used by the Department of State, as of October 6, 1991, is shown in Table B. This table was developed by the Department of State, using consumer expenditure data for all urban U.S. families from Bureau of Labor Statistics data for 1987-88, with detailed tabulations for income ranges up to $90,000 and above. [end of document} Introduction | Living Costs Abroad | Quarters Allowances | Hardship Differentials Quarterly Reports | Office of Allowances | Department of State | Secretary of State