In the situation of transfer pricing by a multinational firm in its trade between plants located in less developed countries (LDCs) and industrialized countries (ICs), the firm, other things equal, will, if it wants to shift recorded profits from its LDC plants to its IC plants, record a price on goods sent from LDCs to ICs that is __________ than a comparable free-market price. For goods sent from ICs to the LDCs, the firm will __________ than a comparable free-market price.

Question

Quizplus · Accepted Answer

To shift recorded profits from LDC plants to IC plants, the firm would record a lower price for goods sent from LDCs to ICs, reducing LDC profits and increasing IC profits. Conversely, recording a higher price for goods sent from ICs to LDCs would further shift profits to ICs by increasing the revenue of IC plants and the costs to LDC plants.

In the Situation of Transfer Pricing by a Multinational Firm