Following question is not formulated in technical language of economics, since I am not an economist and I am mostly interested in accessible answers. Yet, I think it goes deeply into theory of economy and I hope it is not off-topic.
In different regions of the world, costs of living are very different. For simplicity, let us consider two countries which use the same currency (for example euro). In country A, there are high salaries, high housing costs, high costs of services, while in country B, all these quantities are lower. If we compare how much haircuts or meals in restaurant can citizen of country A buy for his salary, the number might be similar to what citizen of country B can buy for his salary. The prices of commodities often do not differ that much, but they tend to differ as well. The quality of services is similar. My question is: What is in the core of the difference in costs of living? What causes them?
To clarify, I am not interested in answers like "country A is more developed", or "country A is more rich", since it doesn't explain the issue, it just gives it another name. I would like to understand the mechanism. I have two hypotheses, which might be the cause, but I am not able to judge which one is more true, or if they are correct at all.
Hypothesis 1: History. During creation of the common currency, there was some agreement how much the national currencies are worth. (Based on international trade and older history.) This set up the level of costs of living to some value. If there is not much trade and migration between country A and B, costs of living equilibrate only slowly.
Hypothesis 2: Transfer from other sectors. If there is some high technology and well paid industry in country A, employees of this industry can afford better services and can afford to offer more money for housing, which increases salaries of all people in services and possibly transfers to all sectors of society.