Arbitrage, taking advantage of price differences, is not something only rich and clever businessmen can do. Ordinary people like you and me can do it just as well, in our own ways.
The value of money is different for everyone. There are two ways in which we can assign value to our money, first by observing how much effort or time it takes to make the money, and secondly by looking at what we can get for our money, the utility. While you’re reading this post, please forget for a moment your nominal income and the nominal cost of things, but think instead of how much utility your time can buy.
I recently went on a short holiday to the Philippines, the sunny island nation south of Japan. As most of you will now, prices in the Philippines are generally lower than in Japan. The utility local people can get for an hour of work may be similar. If you work in Japan, like me, you can get a lot more value for your money down there compared to here.
Just some examples. In my case 1 hour of work equals about ½ a night accommodation in a clean budget hotel in Japan. In the Philippines I can get at least 2 nights out of my hour.
|1 hour of work
||12 beers in a bar
||5 beers in a bar
|1 hour of work
||2 nights in a hotel
||½ night in a hotel
|1 hour of work
||1 dive + equipment
||1/3 dive + equipment
|1 hour of work
||600 km on overnight boat in 4p cabin
||200 km on highway bus
|1 hour of work
||Seafood buffet for 4 people
||Seafood buffet for 1 person
If I tried hard I could probably get even more value for my money, but simply deciding to have fun abroad instead of here was the main cost-saving factor.
It would not be a smart move for a person working in the Philippines to holiday in Japan, not if he wanted to something else than strolling around and reading books on park benches while sipping beers from vending machines. On the other hand, a Filipino could work abroad for some years, as many do, and then retire in his own country and enjoy a more comfortable lifestyle as he previously could. He would also still have the advantage of getting quoted local prices.
To get back to the chart, as you see, for every unit of utility you deny yourself in a country with above average costs, you can enjoy more units of utility in countries with below average costs. It makes a lot of sense to work in an ‘expensive’ country and spend in a ‘cheap’ country. If you want to increase your purchasing power, you could instead of trying to work harder, spend your money more wisely.
One of the most extreme examples is perhaps flying business class. Let’s say a business class ticket is 3 times as dear as an economy class ticket. That means you have to work 3 times as many hours for a little extra comfort. If economy would cost you 6 hours, business would cost you 12 hours extra, probably longer than the flight itself and longer than the time you would need to recover from the lack of comfort in economy. Also there’s a large loss in utility compared to spending those 12 hours on other things.
When to spend and when not
In ‘cheap’ countries, public transport usually costs next to nothing. Still, economically it doesn’t make sense to use it in most cases (I’m talking about transport within cities). Taking a bus might cost you 1 minute of work compared to 10 minutes for taking a taxi, BUT, the taxi is much more comfortable, easy to use and faster as well. If you add up the time you had to work for the fare and the time riding it together, the bus will be more expensive than the car.
In ‘expensive’ countries, the opposite is usually true. In some cases a ten minute walk will cost you actually less time (in work and travel time) than taking a two-minute subway ride. When I was earning minimum wage as student, hitchhiking 700 km through Germany took me less time than taking an express train and having to work for the ticket.
Another thing you can do when you travel is to combine it with purchasing goods and services you were planning to get anyway. For example, a cheap haircut in Japan is about 1000 Yen or 10 Euros. In the Philippines that would be about 3 Euros, maybe even less. Vietnam is a good place to have your business shirts and suits tailor-made. The suits are quite decent, and they fit well (tailor-made) and are only half the price of a basic of-the-rack suit in a budget apparel store. Also, always get cigarettes in the duty-free shop before you fly home, even if you don’t smoke. It’s easy to make a small profit on it, worth maybe a day of budget traveling in India.
While staying at home
Apart from traveling there are many other ways in which you can improve utility, to get more value for your time. Take the scooter/ car comparison I’ve mentioned in earlier posts. Depending on whether you’re alone or have a family, the weather in your place, the vicinity of frequent destinations, congestion likelihood, etc. a scooter may be more or less useful than a car. But that is just the utility without looking at the cost.
I worked 9 hours to buy my scooter, and although I sometimes get a little wet, can’t carry much stuff and can’t drive over 55 km/h, I never have to pay for parking, easily drive through traffic jams and have better mileage than most cars. But I’ll be modest, let’s say my scooter only is 1/5th as useful as a simple car. That car may cost the people wanting to buy it no more than 45 hours of their time to still have the same utility as I have with my scooter.
The iPod + simple prepaid phone vs iPhone is another example. The first combination has in my opinion at least 80% of the utility of the latter, for maybe 20% of the total price. That means that iPod buyers enjoying the same income per hour as iPhone buyers get 4 times more utility for their time.
We all use this arbitrage principle already I believe, some more than others. I think that realizing the true cost of things at all times can really help us to get more value for our time. For me it was interesting to write this post, I hope it will be interesting for you to think about it at your next purchase.