The More Popular a Destination, the More Expensive the Vacation

www.theguardian.com

Why would any budget-conscious traveler plan a vacation to Boston when they can visit Omaha? In March, the cost to live in the historic district of Boston in a Hyatt hotel room for one night is about $220. On the other hand, the cost for a room at Hyatt in Omaha’s historic district for one night is about $110. Unlike Boston, most tourist attractions in Omaha are free or very affordable. Yet, the reason why more people don’t book their summer vacation to Omaha is because Boston has more popular attractions to offer. So why do prices vary depending on location? In his article, Senior editor of The Atlantic Derek Thompson investigates “Why Some Countries and Cities Are So Much More Expensive Than Others.”  

"The most elegant of these theories [to explain why some cities cost more than others] is known... as the Balassa-Samuelson Effect…[which says the varying prices] must come down to workers' productivity, especially in the sectors that can "trade" their goods and services abroad."

The fact that prices vary depending on location is something that has been studied by economists. While the answer is not simple, the Balassa-Samuelson Effect does its best to explain that if workers are more economically productive,  businesses can trade more goods and services, and the improvement would result in more money for the business, worker, and economy. We can prove the Balassa-Samuelson Effect as it goes in part with what economist Adam Smith explained about how one’s self-interest unintentionally improves the economy at large.  Thus, if a business operates more efficiently, exports bring in more money, workers get paid more, and the cost of living rises. As a result, a particular country or city’s economy is more successful and more expensive for travelers.

"A barber might cost more in San Francisco than Detroit. Let's conclude with another fundamental ingredient in prices. Land."

Although economic production contributes the varying prices of locations, land is a key component that I hadn't considered before.  In regards to the Omaha - Boston scenario mentioned earlier,  Boston has more developed land than Omaha. According to Thompson’s argument, this means that the prices in Boston are more expensive because the city has more land where more citizens can live and more business can operate. If the real estate is high, naturally people with higher incomes will settle in the area. In a place like Omaha, prime real estate would be much lower than that in Boston.  

"All things equal, prices rise fastest in the places where rich, talented people want to be."

In a sense, some of the factors - higher exchange rates and real estate - that make a particular location more expensive contributes to a vicious cycle of high prices. The more economically prosperous the area, then the more people will live and business will operate there only furthering prosperity.  In return, the popularity of the area leads to more tourism. As discussed in a previous blog post, tourism is one of the top exported goods for a city or country.  In theory, over a long period of time, by traveling to popular tourist cities we are raising the cost of traveling.

While not the most ideal vacation destination, (theoretically speaking) traveling to Omaha might be the best vacation for your wallet.

FUTURE RESEARCH:

In terms of traveling, are Americans restricted by the buying power of the dollar?