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The city that never sleeps is also the city that can cost an arm and a leg.
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updated 8/10/2008 7:14:15 PM ET 2008-08-10T23:14:15

New York City's got fashionable Fifth Avenue, trendy Tribeca and an oasis in Central Park. To enjoy those perks, residents pay up.

The Big Apple topped a new list of America's most expensive cities, with a measured cost of living surpassing that of Houston, Boston and Washington, D.C. The culprit? High rent: $4,500 a month on average for a two-bedroom, unfurnished luxury apartment.

Los Angeles comes in second place. Its residents can partly blame a long, expensive commute. The average driver there spends 72 hours a year stuck in traffic delays, and, as of July 21, the cost of a gallon of regular gas was $4.46.

To determine the U.S. cities where the cost of living is highest, the London office of Mercer, an American human resources consulting company, measured the prices of the same basket of goods in 253 of the world's cities. The basket is composed of over 200 products, representative of executive spending patterns and including everything from rent for a luxury apartment to the cost of a fast-food hamburger.

Location has a lot to do with why New York and Los Angeles top the list.

In New York, the need for more homes has been increasing since the mid-1970s, says Edward Glaeser, an economist at Harvard University.

"Before 1970," he says, "workers in some sense were paid a premium to live in New York." This, says Glaeser, was due to its reputation for crime and dirtiness. "Now, people pay a premium to live there."

The change happened when the city began to experience robust economic growth that's still occurring, despite some hiccups along the way. Even though business is increasingly global, New York is a center for industries that produce ideas, like finance and publishing, notes Glaeser.

"You don't see anyone relocating to South Dakota," he says. "The idea now is that you become smart by hanging around other smart people, which New York has in abundance. That's why it's been able to thrive."

L.A. — another idea factory, though focused on the entertainment industry — remains expensive in part because of people's desire to live in the city's warm, Mediterranean climate.

However, the amount of money it costs to reside in New York or L.A. is chump change compared to many cities abroad. Out of 253 major metropolises around the world surveyed, New York ranked 22, seven places lower than in 2007. In fact, it was the only American city to break the top 50. Los Angeles placed 55th overall, also seven places lower than last year.

The reason U.S. cities have fallen in the rankings is simple: The dollar is weak.

"The dollar has been declining steadily in the past several years, which has resulted in an overall decrease in the cost of living in 19 U.S. cities," said Mitch Barnes, a principal at Mercer in the U.S., in a note attached to the report.

For example, in terms of expenses, Washington, D.C., only ranks a little above average compared with the 252 other major cities around the world. But in the U.S., it's the 10th most expensive city to live in. Those prices have a lot to do with the high inflation. However, if you're looking for a good job to pay those bills, there's a decent chance you'll find one in the capital. It ranks No. 6 on our list of the best cities for young professionals.

And despite the dismal real estate market, Miami is still a pricey spot, mostly due to its vibrant nightlife, tourism and large consortium of creative professionals. But the city dropped significantly in the ranks since 2007 — 24 places, from No. 51 to No. 75 out of 253 cities worldwide. Want to take advantage of the decrease in prices? Try renting instead of buying.

Yet all is not lost for the economically disadvantaged. In New York, for example, there are hidden deals throughout the city.                           

"One can find some of the most expensive and most inexpensive things in New York," says economist Dr. Arnold Kling, writer of Econlog, an economics blog from the Library of Economics and Liberty funded by Liberty Fund, Inc., a private, educational foundation based in Indianapolis. "It has one of the more unequal income distributions around, which means there's demand at both ends of the spectrum."

© 2012 Forbes.com

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