Lecture 9 - PPP I Flashcards
1
Q
What is the Law of One Price?
A
The idea that identical products sold in different markets will sell at the same price, when expressed in terms of a common currency.
2
Q
What was the practical use of the LOOP? Why was it so important in the past?
A
Charging an interest rate was considered unlawful but the LOOP was allowing to circumvent this in the FOREX market because the interest rate was charged based on the differences between domestic and foreign prices. Empirical evidence associated with the law of one price is given by the Big Mac index.
