What does the law of one price say?
What will be an ideal response?
Applied to international trade, the law of one price states that the same goods should sell for the same price in different
countries after making adjustment for the exchange rate between the two currencies. The idea is that the worth of a
good does not depend on where it is bought or sold. Thus, in the long run, exchange rates should adjust so that the
purchasing power of each currency is the same. As a result, exchange rates should reflect the international differences
in inflation rates, with countries with high rates of inflation experiencing declines in the value of their currency.
The law of one price is the underlying principle of the theory of purchasing-power parity (PPP) that states that
exchange rates adjust so that identical goods cost the same amount regardless of where in the world they are
purchased.
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