1 By the law of one price one would expect a video game cons

1. By the law of one price one would expect a video game console to sell at the same price in Japan as in the US. This is very often not the case. Why do violations of the law of one price in the international goods market occur?

2. Can the purchasing power parity fail to hold even though the law of one price holds for all goods in the two economies? Use the simple example of 2 goods and 2 countries in your answer.

Solution

1. The law of one price requires that a particular commodity would be sold in all the markets at the same price. Now, think of it as a practical thing. Consider an example, let\'s take Gaming console itself. Let us assume that Gaming consoles can be made at a cheaper price in Japan, so Japan is the market where we want to produce the gaming consoles. Gaming consoles need to be shipped across the markets. The shipping cost will vary market by market depending on the distance from Japan, the innovations in the transport industry and a lot of other factors as well.

We know the fact that shipping cost varies market to market. It would mean that the price of the product will not same in all the markets due to the shipping cost it takes to acquire the product. Price of Gaming console can of thought of being same in the markets which are near to Japan but will surely vary and will be higher in the markets which are really farther from Japan.

So, it will not be possible to keep the One price law in this case.