Question

Consider each of the following goods and services. For each, identify whether the law of one price will hold, and state whether the relative price, qUSg/FOREIGN, is greater than, less than, or equal to 1. Explain your answer in terms of the assumptions we make when using the law of one price.

a. Rice traded freely in the United States and Canada?

b. Sugar traded in the United States and Mexico; the U.S. government imposes a quota on sugar imports into the United States

c. The McDonald’s Big Mac sold in the United States and Japan

d. Haircuts in the United States and the United Kingdom

Answer 1