The Law of One Price: A Canada/U.S. exploration

John Baldwin and Beiling Yan ()

Review of Income and Wealth, 2004, vol. 50, issue 1, 1-10

Abstract: The paper examines whether arbitrage tends to equalize commodity prices for internationally traded homogenous products. It also investigates whether the increasing integration of North American markets has reduced price differences over time, and tests the validity of the so‐called Law of One Price. We find that price differences for homogenous tradables between Canada and the U.S. are smaller than those for differentiated tradables and non‐tradables, and are statistically insignificant over the period 1985 to 1999. We find no support for the notion that the increasing integration of North American markets due to trade liberalization has reduced price differences between Canada and the United States. Instead, the shifts in the price differences (expressed in the same currency) generally reflected fluctuations in the exchange rate. Canadian prices adapt with a lag to U.S. price changes that are brought about by changes in the exchange rate.

Date: 2004
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