Economics Homework Help

R1

Econ: 

The law of one price is determined by the law of demand. Which is by how much a particular person is wanting a product. If a company really wants to sell a product, the lower the cost, the more of that product they are going to sell. When a company doesn’t have as much of a certain product then the price will be higher in hopes that not as many people will purchase it. Even though they call this the “law” of demand it really doesn’t matter until the purchasing power parity comes into play. When it comes to the exchange rate between countries, the richer countries will tend to use the poorer countries which happens because the rich know they can sell it cheap to the poor and they will still purchase it. Which is how those wealthier countries are seen with a higher average of exchange because of the cheaper stuff they are selling. 

References: 

Learning, L. (n.d.). Introduction to Business. The Law of Demand | Introduction to Business. https://courses.lumenlearning.com/suny-hccc-introbusiness /chapter/the-law-of-demand/.

R2

The law of one price tells us that in a competitive market free from factors such as transportation costs and tariffs, the same good should sell for the same price in different countries when expressed in the same currency (Krugman, Paul R.). The law of one rule holds true because if the price of the same good were to become more or less expensive in one country, the demand would change and essentially bring it back to equilibrium, otherwise known as arbitrage opportunity. The law of one price can falter when you consider things like transportation costs, which can potentially increase costs for buyers. Another reason may be tariffs in place that increase the cost for a certain country. A big reason price levels are lower in poor countries is because of supply and demand. If prices are too high for the general population then the product will simply go unsold. In poor countries prices must reflect what the consumers are able to pay, which ultimately pulls the price levels down. I think both the Big Mac and Netflix are great examples as the product should remain the same regardless where you are buying it. Another example might be a pair of Nike Air Force 1’s, a widely popular shoe which is available practically everywhere. 

Reference

Krugman, Paul R., Obstfeld, Maurice. and Melitz, Marc. (2018). “International Economics. Theory & Policy”. 11th Edition. Pearson.

R3

FThe Law of one price states that there will be one price for an identical asset or commodity globally no matter where the location is with certain factors been considered. The law of one price can be achieved by getting rid of price differences through arbitrage opportunities between markets. The forces of the market equilibrium will ultimately converge the price of the asset. The law of one price holds true when there are no violations such as transportation costs, transactions costs, legal restrictions, and market structure. The above-mentioned violations will be the reasons why the law of one price will not hold true. For instance, if there is a transaction cost which is the expense that is incurred when buying goods and services, involved in the trade then the law of one price will not hold true because transaction cost varies across the different markets, geographic regions, prices for the same good and services and can also vary between markets and the same thing goes for the other violations. The empirical support for purchasing power parity (PPP) and the law of one price is so weak in recent data because of the inability to detect mean reversion in real exchange rates during the recent float through standard univariate ADF tests. The price levels are lower in poorer countries because there is more labor in those countries and also the exchange rate is less in poor countries in comparison to rich countries. If the prices are high, the people in the poor country will not be able to purchase the products. The product I will use is mobile phones. Mobile phones are being used globally. The quality is the same everywhere for example apple phones are everywhere in the world and have the same quality. It will be a great product to use for the PPP. 

References
Team, T. I. (2021, June 9). Law of One Price. Investopedia.

https://www.investopedia.com/terms/l/law-one-price.asp.
Krugman, Paul R., Obstfeld, Maurice. and Melitz, Marc. (2018). “International Economics. Theory & Policy”. 11th Edition. Pearson.