The usefulness of the law of one price is that it helps us determine whether a currency is overvalued or undervalued.

Question

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The law of one price states that identical goods should have the same price in different markets if the prices are expressed in the same currency. If a currency is overvalued, then goods in that country should be more expensive compared to prices in other countries, violating the law of one price. If a currency is undervalued, then goods in that country should be cheaper compared to prices in other countries, again violating the law of one price. Therefore, the law of one price can be a useful tool to determine whether a currency is overvalued or undervalued.

The Usefulness of the Law of One Price Is That