what is the law of one price 
the law of one price is an economic concept that states that the price of an identical asset or commodity will have the same price globally regardless of location when certain factors are considered the law of one price takes into account a frictionless market where there are no transaction costs transportation costs or legal restrictions the currency exchange rates are the same and that there is no price manipulation by buyers or sellers the law of one price exists because differences between asset prices in different locations would eventually be eliminated due to the arbitrage opportunity the arbitrage opportunity would be achieved whereby a trader would purchase the asset in the market it is available at a lower price and then sell it in the market where it is available at a higher price over time market equilibrium forces would align the prices of the asset understanding the law of one pricethe law of one price is the foundation of purchasing power parity purchasing power parity states that the value of two currencies is equal when a basket of identical goods is priced the same in both countries it ensures that buyers have the same purchasing power across global markets in reality purchasing power parity is difficult to achieve due to various costs in trading and the inability to access markets for some individuals the formula for purchasing power parity is useful in that it can be applied to compare prices across markets that trade in different currencies as exchange rates can shift frequently the formula can be recalculated on a regular basis to identify mispricings across various international markets example of the law of one priceif the price of any economic good or security is inconsistent in two different free markets after considering the effects of currency exchange rates then to earn a profit an arbitrageur will purchase the asset in the cheaper market and sell it in the market where prices are higher when the law of one price holds arbitrage profits such as these will persist until the price converges across markets for example if a particular security is available for 10 in market a but is selling for the equivalent of 20 in market b investors could purchase the security in market a and immediately sell it for 20 in market b netting a profit of 10 without any true risk or shifting of the markets as securities from market a are sold on market b prices on both markets should change in accordance with the changes in supply and demand all else equal increased demand for these securities in market a where it is relatively cheaper should lead to an increase in its price there conversely increased supply in market b where the security is being sold for a profit by the arbitrageur should lead to a decrease in its price there over time this would lead to a balancing of the price of the security in the two markets returning it to the state suggested by the law of one price the big mac index is an informal measure of the significance of trade barriers and other geographic frictions in establishing the costs of similar goods based on the market cost of mcdonald s signature burger although a big mac is nearly identical in each geography variations in labor costs agricultural prices and local regulations mean that the sandwich may cost as much as 8 17 or as little as 2 39 1exceptions to the law of one pricein the real world the assumptions built into the law of one price frequently do not hold and persistent differentials in prices for many kinds of goods and assets can be readily observed 