The law of one price states that identical goods in different locations should have the same prices without taking transportation costs and tariffs into consideration and under free competition. This paper investigates whether this law holds or not. The analysis is based on 57 countries from all over the world. The data consists of six goods which are coke, rice, sugar, gasoline, a movie or theatre ticket and the perfume “Amor Amor” from Cacharel. Firstly the theory of the Law of One Price will be briefly explained. Secondly the prices of each product are compared within the countries in the data analyses. Finally, a conclusion is made out of the results and gives an answer to the aim of this paper and it is explained, why the theory might not hold in reality.
2. The Theory
According to the Law of One Price, similar goods that are priced in different currencies in different countries must sell for same price when their prices are expressed in a common currency (Feenstra & Taylor, 2011). The main driver behind this theory is arbitrage. With existing price differences for one good, buyers would buy the good at the location where it is cheaper. The demand for the good in the cheap location will increase whereas the demand in the expensive location will decrease. As a result of the changed demand, the prices will go up in the former cheaper location and will go down in the former more expensive location and will be equalized (Feenstra & Taylor, 2011).
3. Data Analyses
The first good we are going to talk about is coke. The data shows that the prices within our sample are usually between one and two Euros. However, there are small fluctuations between the prices and there is one extremely high outlier that goes up to 211.93€. This extraordinary outlier is from Qatar. It is possible that the price is that high because the group forgot to type in decimals, leading to these extreme price. During our research we found out that Qatar is...
Please join StudyMode to read the full document