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

Review of Income and Wealth, Vol. 50, No. 1, March 2004

11 Pages Posted: 21 Oct 2009

See all articles by John R. Baldwin

John R. Baldwin

Statistics Canada - Microeconomic Analysis Division

Beiling Yan

Government of Canada - Micro-Economic Analysis Division

Date Written: 2009

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

Baldwin, John R. and Yan, Beiling, The Law of One Price: A Canada/U.S. Exploration (2009). Review of Income and Wealth, Vol. 50, No. 1, March 2004 , Available at SSRN: https://ssrn.com/abstract=1491789

John R. Baldwin

Statistics Canada - Microeconomic Analysis Division ( email )

24 Floor - R.H.Coats Building
Tunney's Pasture
Ottawa, Ontaria K1A 0T6
Canada
613-951-8588 (Phone)
613-951-5403 (Fax)

Beiling Yan (Contact Author)

Government of Canada - Micro-Economic Analysis Division ( email )

24 Floor - R.H.Coats Building
Tunney's Pasture
Ottawa, Ontaria K1A 0T6
Canada

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