Karachi Tops List of Cheapest Cities for Americans

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While rent levels in Karachi are far lower than in most international cities, costs for high-end goods and services were not far below U.S. levels: A cup of coffee from a café costs about $2.24 and a three-course business dinner can cost $43 per person.

Adopting a Local Standard of Living

"It's the availability of what you're looking for that will drive prices," says E. James "Jim" Brennan, senior associate at the ERI Economic Research Institute. For example, he says, the cost of Western food and groceries in Bishkek, Kyrgyzstan, can be twice as expensive as in the U.S., while a gallon of regular gasoline costs only around $2.40.

Prices in any city can range from extremely low to extremely high, depending on lifestyle. In places with few amenities for a transient population, many businesses have emerged to cater to the needs of business travelers—often backed by company expense accounts, says Brennan. This creates an entirely different spending pattern from locals.

Indeed, the majority of local products and services in Pakistan belong in a completely separate price category. Pakistan's Federal Bureau of Statistics estimates that national per capita income is about $1,100; few locals can afford the daily luxuries that many expatriates take for granted.

Those who understand the local language—or simply want to live even more cheaply—may choose local alternatives in order to save money. However, Mercer's Powers says it is unrealistic for companies to expect an executive to adopt a local standard of living in many of the world's cheapest cities, where overall quality of life is low by Western standards. While employers generally will not provide an additional cost of living allowance as they do in such expensive cities as Tokyo, Powers says they might still offer a hardship allowance, incentive pay, education allowance for the employee's children, and pay for additional security.

"What is seen as excessive [to many] is only reasonable and logical from the perspective of the people who are working there, especially if they see their peers living the high life and sitting at the table with decisionmakers," says Brennan. Expecting an executive to adopt a local standard of living may save a few dollars in the short term, he says, but can cost the company in the future. "If they are a resource for you, you have to make sure they are happy and motivated."

Then again, not everyone needs fancy dinners and imported goods to maintain a high quality of life. Brennan says, "It depends on what the lifestyle expectations of the transferee are."

Click here to see where the cost of living for expatriates are lowest.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

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