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

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  • John R. Baldwin
  • Beiling Yan

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.

Suggested Citation

  • John R. Baldwin & Beiling Yan, 2004. "The Law of One Price: A Canada/U.S. exploration," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(1), pages 1-10, March.
    • Handle: RePEc:bla:revinw:v:50:y:2004:i:1:p:1-10
    DOI: 10.1111/j.0034-6586.2004.00108.x
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    Cited by:

    1. John R. Baldwin & Beiling Yan, 2007. "Exchange Rate Cycles and Canada/US Manufacturing Prices," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(3), pages 508-533, October.
    2. Kai Yin Woo & Shu Kam Lee & Alan T. Y. Chan, 2020. "Food price convergence in Canada: A nonparametric nonlinear cointegration analysis," Economics Bulletin, AccessEcon, vol. 40(3), pages 2361-2371.
    3. Philipp Maier, 2005. "A global village without borders? international price differentials at eBay," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    4. Baldwin, John R. Yan, Beiling, 2006. "Les mouvements cycliques du taux de change et les prix dans les secteurs canadien et américain de la fabrication," Série de documents de recherche sur l'analyse économique (AE) 2006041f, Statistics Canada, Direction des études analytiques.
    5. Philipp Maier, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department.

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