Question

The ____ states that identical goods should sell for the same price anywhere in the world. Select one: a. currency equilibrium b. Law of One Price c. purchasing power parity d. parity and hedging

Answer 1

The correct answer is b. Law of One Price

Law of one price states that goods having identical characteristics should sell for the same price all over the world. This law aims at eliminating Arbitrage opportunities because the trader will not be able to make a profit by buying the goods at a lower price somewhere and selling the identical goods at a higher price elsewhere.

Assumptions of this theory are

• No trade restrictions
• There are no transportation costs involved
• No transaction costs

The above theory may not hold good as trade restrictions do exist in real world and movement of goods will involve transportation. Thus ignoring transportation cost and determining prices are not likely in a real scenario.