Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.8 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars.

Question

Quizplus · Accepted Answer

The law of one price states that in the absence of transportation costs and barriers to trade, identical goods should sell for the same price in different countries when prices are expressed in a common currency. For iPhones, 240 dollars converted to euros at 0.8 euros/dollar is 192 euros, which is different from the 180 euros price in Belgium, so the law does not hold. For binoculars, 75 dollars converted to euros at 0.8 euros/dollar is 60 euros, which is the same as the price in Belgium, so the law holds for binoculars.

Suppose IPhones Cost 180 Euros and 240 Dollars in Belgium