The law of one price is an economic theory which argues that the price of the same good or service should have the same price worldwide regardless of location when certain factors are taken into account. These factors place market constraints on the fact that there are no transaction, transfer or legal restrictions. Assuming that the exchange rates will be the same and there is no price manipulation either by buyers or sellers.
The law of one price was developed because of its Arbitrage property, with the result that differences between the prices of goods or services in different locations are eliminated as prices are balanced by the equilibrium forces of the market by aligning the prices of the asset.
The direct nominal exchange rate is calculated as the domestic currency (euro) to the foreign currency and is respectively:
|
Currency pair |
Spot Exchange |
PPP |
Real exchange |
|
EUR |
1 |
1 |
1 |
|
EUR/DKK |
0.13 |
0.11 |
1.19 |
|
EUR/USD |
0.90 |
0.67 |
1.33 |
|
EUR/JPY |
0.0073 |
0.0057 |
1.27 |
The Purchasing Power Parity (PPP) is calculated as the quotient of the prices of goods (1lt milk) of the domestic to foreign market. Comparing the direct exchange rate and the exchange rate based on the law of one price we conclude that the currencies of Denmark, America and Japan are devalued by 16% 25% and 22%.
Also as a measure of comparison can be done by subtracting the base currencies of the real due to exchange rates. This way we compare the prices of goods with each other, finding that the most expensive milk is in America, then in Japan, followed by Denmark with the domestic market having the cheapest product.
The annual interest rate according to official sources of the central banks, the exchange rates of the spot market of currencies (based on the euro) are as follows:
|
Ισοτιμία |
Exchange Rate |
Interest rate |
|
EUR |
1 |
0% |
|
EUR/DKK |
0.12 |
-0.6% |
|
EUR/USD |
0.94 |
0.5% |
|
EUR/JPY |
0.0072 |
-0.1% |
