What Is Law Of One Price And Purchasing Power Parity?
In economic law, law of one price states that the prices of the identical products in an efficient market must be same. This law is associated with free trade and globalization. This law actually advocates that all sellers will move towards highest prevailing price, however, buyers will flock to lowest market price. It also states that convergence on one price is immediate in the efficient market. The concept of purchase power parity is that the long-term equilibrium exchange rate of the currencies of two countries in an efficient market tend to equalize their purchasing power. The purchasing power parity is based on law of one price. For example, if England and America produce same steel, then if the price of one steel in England is y pounds and in America it is z dollars, then on the basis of law of one price, the price will be same, therefore, currency rate would be y/z.
