The Law of One Price Essay

2182 Words 9 Pages
The “Law of One Price”, as described by Isard (1977), appears to be empirically invalid, yet there are conflicting evidences such as gold prices as at 24 February 1995 (Rogoff, 1996), suggest that the Law seems to hold true. This essay shall evaluate the argument using both theories and empirical evidences related to Law of One Price and Purchasing power parity (hereafter PPP).
In essence, Law of One Price (hereafter LOOP) states that “the price of identical goods that are traded is the same in all geographical locations” (Persson, 2010, p. 221). To begin the investigation, preliminary observations can be made using market information with the Eurozone where the same currency is used within the currency union. Consequently, effect on
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The “Law of One Price”, as described by Isard (1977), appears to be empirically invalid, yet there are conflicting evidences such as gold prices as at 24 February 1995 (Rogoff, 1996), suggest that the Law seems to hold true. This essay shall evaluate the argument using both theories and empirical evidences related to Law of One Price and Purchasing power parity (hereafter PPP).
In essence, Law of One Price (hereafter LOOP) states that “the price of identical goods that are traded is the same in all geographical locations” (Persson, 2010, p. 221). To begin the investigation, preliminary observations can be made using market information with the Eurozone where the same currency is used within the currency union. Consequently, effect on differences in currencies “real purchasing value” is eliminated. In an ideal world where LOOP is applicable, if a car cost €10k in Paris, the same car should also be priced at €10k in Berlin. However, Wittendorff (2010) commented that despite the introduction of the single currency, substantial pricing differences are still observed amongst member states of the currency union. Indeed, this view is supported by an analysis on price differences of identical vehicles sold within the Eurozone across 3 years (Appendix 1) produced by the European Commission. The analysis suggests the above hypothesis does not hold good and pricing differences of up to 44.3% on the same car has been observed within the Eurozone.
In a nutshell, when there is a pricing