How Far Can We Push The "Law of One Price"?

Abstract

Students exposed to the pure theory of international trade have been seduced by visions of an imaginary world with few goods, each typically produced by several countries but nevertheless homogeneous. In the assumed absence of transport costs and trade restrictions, perfect commidty arbitrage insures that each good is uniformly priced (in common-currency units) throughout the world -- the "law of one price" prevails.