In an open economy, the law of one price implies that

Question

Quizplus · Accepted Answer

The law of one price states that identical goods should have the same price in different markets when converted to the same currency. In an open economy, this means that purchasing power parity should hold, meaning that the exchange rate should adjust so that the same basket of goods costs the same in different countries. At this point, there would be no further gains from trade. Therefore, the correct choice is C.

In an Open Economy, the Law of One Price Implies