According to the law of one price, which good or service is likely to have a larger price difference in different countries?

Question

BlackTom AI · Accepted Answer

Perishability and transport costs strongly affect how closely the law of one price holds across countries, so perishable, low-value, and heavily regulated goods tend to show larger international price differences.

1. Relevant knowledge points and concepts
- Law of one price: identical tradable goods should sell for the same price across locations once exchange rates and transport costs are accounted for, because arbitrage removes price differences.
- Frictions: transportation costs, perishability, tariffs, sanitary regulations, and transaction costs block arbitrage.
- Tradability: manufactured, durable goods are more easily traded and thus more price-equalized than fresh, perishable, or heavily regulated goods.

2. Step-by-step reasoning process
- Determine tradability and friction level for each option.
- Frozen pizza: durable when frozen, long shelf life, standardized product; can be shipped internationally in refrigerated containers with relatively low per-unit transport cost.
- Shampoo: manufactured, branded, non-perishable, low weight-to-value ratio; widely traded and subject to global pricing strategies.
- Plastic lawn chairs: durable, cheap to ship in bulk, mass-produced internationally; tradeable with low per-unit transport costs.
- Fresh eggs: highly perishable, require rapid refrigerated transport, face strict biosecurity and sanitary regulations, often subject to local production, subsidies, and seasonal supply shocks.

3. Intermediate steps (conceptual)
- For each good, estimate arbitrage feasibility: high for shampoo, frozen pizza, plastic chairs; low for fresh eggs.
- Lower arbitrage feasibility → larger potential price differentials.

4. Why the correct answer is correct
Fresh eggs are least tradable due to perishability and regulatory barriers, so local supply/demand and costs dominate prices; arbitrage cannot quickly equalize prices internationally. These characteristics produce larger cross-country price dispersion consistent with the law of one price failing more for such goods.

5. Why other options are incorrect
- Frozen pizza: can be shipped frozen; easier arbitrage.
- Shampoo: nonperishable, globally traded consumer product with brand pricing.
- Plastic lawn chairs: durable and mass-produced with low transport costs.

6. Conclusion
Given perishability, regulations, and limited arbitrage, fresh eggs are most likely to have larger international price differences. This confirms the provided answer: fresh eggs.

According to the law of one price, which good or service is likely to have a larger price difference in different countries?Single choice

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