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

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. Copyright 2004 Blackwell Publishing Ltd.

PPPS: Purchasing Power or Producing Power Parities?

“…Microdata used by the National Accounts to estimate the change in the volume of exports and imports also suggests that export and import prices have not adjusted perfectly to changes in exchange rates after 2002. Moreover, the results of Baldwin and Yan (2004) suggest that the level of Canada/U.S. prices varies over time.…”

“…This is particularly so for Canada. Empirical evidence for Canada that compares Canadian and U.S. expenditure prices or industry output prices suggests that the law of one price does not hold at every point in time, and may not even hold on average over long periods of time (Baldwin and Yan 2004, 2008. Microdata used by the National Accounts to estimate the change in the volume of exports and imports also suggests that export and import prices have not adjusted perfectly to changes in exchange rates after 2002.…”

Exchange Rate Cycles and Canada/US Manufacturing Prices

“…Most studies of PPP or the extent to which exchange-rate effects are passed through to local markets focus on the prices of commodities 3 and then primarily on the pass-through of exchange-rate changes on import or export prices. 4 Baldwin and Yan (2004) make use of commodity price data derived from the Canada/US PPP program of Statistics Canada to ask whether Canadian prices in recent years have equated to US prices after the implementation of the North American Free Trade Agreement.…”