The Law of One Price states that identical goods should have the same price globally. It encompasses characteristics like uniform quality, absence of arbitrage opportunities, and market efficiency. It explains price alignment through market integration and arbitrage. The law applies to commodities, financial assets, and forex trading, with violations stemming from transportation costs and trade barriers.
- Identical Goods: Same quality and attributes across markets.
- No Price Arbitrage: Eliminates risk-free profit from price disparities.
- Efficient Markets: Rapid price adjustment to reduce discrepancies.
- Market Integration: Aligns prices due to integrated markets.
- Arbitrage: Exploiting price differences for profit.
- Commodity Markets: Global convergence of oil prices.
- Financial Assets: Exchange rates and interest rates align.
- Transportation Costs: Impacts due to shipping and transactions.
- Trade Barriers: Tariffs and regulations causing price variations.
- Commodity Prices: Integrated markets lead to convergence.
- Forex Trading: Efficient forex markets ensure aligned exchange rates.
- Economic Principle: The Law of One Price is a fundamental economic principle that asserts that identical goods should have the same price in various markets.
- Identical Goods: The law applies to goods with uniform quality, attributes, and characteristics across different markets.
- No Price Arbitrage: The absence of opportunities for risk-free profit due to price disparities prevents arbitrage.
- Efficient Markets: Markets adjust rapidly to eliminate price discrepancies, ensuring efficient price convergence.
- Market Integration: The concept is explained by the alignment of prices through market integration, where interconnected markets influence each other’s prices.
- Arbitrage: The possibility of arbitrage, exploiting price differences between markets, further clarifies the law’s principles.
- Commodity Markets: The law is evident in global commodity markets, where identical commodities like oil and precious metals exhibit convergence in prices due to market integration.
- Financial Assets: Financial instruments such as currency exchange rates and interest rates align across markets in accordance with the law.
- Transportation Costs: Transportation expenses impact price disparities, as they add to the cost and affect the uniformity of prices across markets.
- Trade Barriers: Tariffs, regulations, and trade barriers can lead to deviations from the law, causing variations in prices between markets.
- Use Cases:
- Commodity Prices: Integrated markets lead to commodity price convergence. For instance, oil prices tend to align globally due to market integration.
- Forex Trading: In foreign exchange trading, efficient forex markets ensure that exchange rates align according to the Law of One Price.
- Big Mac Index: The “Big Mac Index” is a lighthearted illustration of the law, using McDonald’s Big Mac as a benchmark to compare purchasing power parity between countries.
- Arbitrage Opportunities: Instances of price differences between markets present opportunities for arbitrage, reinforcing the law’s principles.
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