What impediments in the real world might prevent the Law of One Price from holding for...

What impediments in the real world might prevent the Law of One Price from holding for a particular good? How is the Law of One Price related to the idea of Purchasing Power Parity (PPP)? What is the evidence for PPP actually existing?

Expert Solution

-The law of one price is the economic theory that states the price of an identical security, commodity or asset traded anywhere should have the same price regardless of location when currency exchange rates are taken into consideration, if it is traded in a free market with no trade restrictions. The law of one price exists because differences between asset prices in different locations should eventually be eliminated due to the arbitrage opportunity.

-The law of one price states that prices of the same good will be identical in different countries. However, a requirement for this to occur is for goods to be traded so that arbitrage conditions exist. Goods that are not traded cannot take advantage of arbitrage conditions and therefore are unlikely to converge to the same price. Even goods that are identical may not converge to the same price because of the local non-traded input price differences (labor, rent, transportation).

-The law of one price theory is the underpinning of the concept of purchasing power parity. Purchasing power parity states that the value of two currencies is equal when a basket of identical goods is priced the same in both countries. It relates to a formula that can be applied to compare securities across markets that trade in different currencies. As exchange rates can shift frequently, the formula can be recalculated on a regular basis to identify mis-pricing across various international markets.

-A few Examples of PPPs

UNITED STATES, DULLES GREENWAYS
UNITED STATES, ORANGE COUNTY’S STATE ROUTE 91 EXPRESS LANES
DEVELOPING LOCAL CAPITAL MARKETS- CHILE

Rahul Sunny answered 1 year ago

Departures from the law of one price might explain why PPP holds only in the long...

Departures from the law of one price might explain why PPP holds only in the long run. True, False or Uncertain?

In looking at Real World Fiscal Policy, one might want to consider the timing, or lag,...

In looking at Real World Fiscal Policy, one might want to consider the timing, or lag, or speed at which a policy can go into effect. How do the Tax cuts of 2001,2003, and the 2020 policies stack up when looking at timing issues?

• Describe one situation with real-world examples in which a programmer might want to create a...

• Describe one situation with real-world examples in which a programmer might want to create a loop that tests its condition in the beginning of the loop and one situation in which the condition is tested at the end of the loop. • There are many situations where infinite loops may occur. Discuss those situations and provide best practices for each of the loop types that help avoid writing infinite loops.

What is the Law of One Price? Describe the mechanism through which the Law of One...

What is the Law of One Price? Describe the mechanism through which the Law of One Price leads to the Theory of Purchasing Power Parity. What is the Theory of Purchasing Power Parity?

What is a real world example of Beer's Law, discss it briefly and include a citation.

Use your real-world experience to discuss what factors could potentially prevent the quantity supplied and the...

Use your real-world experience to discuss what factors could potentially prevent the quantity supplied and the quantity demanded in the aggregate labor market. Please give two possible factors and show how they could stop the equilibrium in a framework of wage, quantity supplies and quantity demanded.

What are some things that often prevent states from participating in international law and courts?

What is the law of one price and what does it mean for the wages of...

What is the law of one price and what does it mean for the wages of U.S. workers?

How does the law of one price work? What happens if this law is violated?

Use an example form the text or one from the real world that illustrates the effective,...

Use an example form the text or one from the real world that illustrates the effective, or ineffective, use of decision making using the steps listed. Discuss why they were successful or not successful. Be specific about which steps were missed, not used, ineffective, etc. *Please use a different answer from the Chegg since my friends already use it. Thankyou.

Question