The law of one price states that if transportation costs are relatively small, then the:
A) nominal exchange rates for every countries' currency must be equal.
B) nominal exchange rate for a currency must equal the real exchange rate for that currency.
C) price of an internationally traded commodity must be the same in all locations.
D) producer with the lowest opportunity cost should be the only producer any commodity.

Question

Quizplus · Accepted Answer

The law of one price states that in a competitive market with no transportation costs and where all goods are identical, the price of an internationally traded commodity must be the same in all locations. This is because arbitrage opportunities will arise if the same good is priced differently in different markets, and traders will buy the cheaper good and sell it in the market where it is more expensive, leading to an equalization of prices. The law of one price does not apply to exchange rates or producer costs.

The Law of One Price States That If Transportation Costs