"The number-one reason why nannies in Manhattan can get paid $200,000 is very simple. Rich families can afford it. (...) Six-figure nannies don't rule the world, but they help explain the world of prices. On a global scale, the price of locally-delivered services, such as nannies and barbers, fluctuate wildly from country to country. A simple haircut in Uzbekistan is much, much cheaper than a simple haircut in Beverly Hills. (...) Why some prices between countries (and even between cities in the same country) differ so dramatically. The most elegant of these theories is known, less elegantly, as the Balassa-Samuelson Effect, after two economists Béla Balassa and Paul Samuelson. The Balassa-Samuelson Effect is a mouthful. Let's call it the "Nanny Effect." In a nutshell, the Nanny Effect says that the price of some goods -- e.g.: Picasso paintings, barrels of oil, bricks of gold, and company stock -- shouldn't vary much by location, because it would create opportunities for arbitrage. (...) There is much more to price levels than the Nanny Effect. Much, much, much more. Restrictive urban policy raises the price of rent in similarly productive cities. Energy policies and levies raise or lower the price of gas. Tariffs raise the price of imports. On a nation-by-nation basis, taxes restrain demand and subsidies increase supply on an idiosyncratic basis." - Amira

"But perhaps the easiest way to mess with Balassa and Samuelson is for a government to manipulate foreign exchange rates. China, for example, is famous for pegging its currency to the U.S. dollar to make its exports more competitive. As a result, services in China are probably cheaper than they would be if the government weren't actively trying to depreciate the currency. If you're happily wondering "Why is China so cheap?" you should thank Beijing. "The B-S Effect [er, Nanny Effect!] explains why on average, prices vary across countries, but in the short to medium run, the exchange rate will also determine how cheap or expensive different countries are," (...) Another way to see this in action is to read the Economist's latest cost-of-living index for cities, an sample of which are in the graph below. The top of the list was dominated by Switzerland (and, to a lesser extent, Japan and Australia). Why Switzerland? Blame Greece and Germany. The debt crisis sweeping Europe has created a flight to safety to Swiss Francs, which are considered safer. As the Franc appreciated, prices have gone up compared to the euro and the dollar. Japan and Australia have also seen strong currency appreciation over the last few years, which made it relatively expensive for foreigners. (...) If we had to boil all this -- Balassa-Samuelson, Nanny Effect,exchange rates, urban policy -- down to a sentence, it might be this: All things equal, prices rise fastest in the places where rich, talented people want to be." - Amira