How expensive is living in Israel? Less than you thought

• Author: ZEV STUB
• Published date: 11 October 2021
• Publication title: Jerusalem Post, The: Web Edition Articles (Israel)

Heavily-cited OECD price calculations for the years 2005-2017, included distortions that made Israeli prices appear to be higher than they actually were in relation to the OECD average, Prof. Dan Ben-David and Prof. Ayal Kimhi wrote in the report.

So for example, while OECD figures indicate that food prices in Israel were 36 percent higher than the OECD average in 2017, they were actually only 3.1% higher when calculated using purchasing power parities (PPPs), which use the prices of specific goods to compare the absolute purchasing power of the countries' currencies.

That's a much more accurate way to compare prices than by using foreign exchange rates, which often reflects the realities of financial markets more than those of the average citizen, Ben-David said. "A perfect example of how this works was in 2002, during the Intifada, when Israel's exchange rate suddenly jumped to five shekels to the dollar in the course of a few weeks," Ben-David said.

"That didn't mean that prices all of a sudden jumped in stores. It was just because people were taking their money out of the country. PPP provides a more accurate picture of how much things actually cost for consumers."

The OECD itself is inconsistent when choosing how to compare prices, Ben-David explained. "When the OECD compares prices between two countries, it accounts for economic differences between the two countries by using PPP," Ben-David said. "Economists have been doing it that way for years, and that is the correct way to do it."

However, when the OECD calculates price differences between multiple countries, it does so using foreign exchange rates, which can yield wildly different numbers. Ben-David and Kimchi calculated the size of the gaps between PPP and foreign exchange rates for OECD countries for 2017, the most recent OECD benchmark year for cross-country comparisons of various goods and services. The gap for the shekel was -4%, while in other countries, the gap ranged from 164% in Turkey to -23% in Iceland.

Comparing prices using PPP instead of exchange rates, Ben-David and Kimchi found that the...