The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?
The Economist magazine’s famous Big Mac Index uses the price of McDonalds’ burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly – cross-border flows of burgers won’t align their prices internationally. Read more »