A product sells for $100 in the United States and for 11,000 yen in Japan. Assume that the exchange rate is $1 = 95 yen. What will happen if the law of one price holds true?

Question

Quizplus · Accepted Answer

The law of one price states that in the presence of a competitive market structure and the absence of transportation costs and tariffs, identical goods should sell for the same price when prices are expressed in a common currency. Given the exchange rate of $1 = 95 yen, the price in Japan (11,000 yen) is higher than the price in the U.S. ($100 or 9,500 yen when converted). To align with the law of one price, the yen price would need to decrease, and the dollar price would need to increase until the prices are equal when adjusted for the exchange rate.

A Product Sells for $100 in the United States and for 11,000