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The Regionalization of the World Economy$
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Jeffrey A. Frankel

Print publication date: 1997

Print ISBN-13: 9780226259956

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226260228.001.0001

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Regional Patterns in the Law of One Price

Regional Patterns in the Law of One Price

The Roles of Geography versus Currencies

Chapter:
(p.153) 6 Regional Patterns in the Law of One Price
Source:
The Regionalization of the World Economy
Author(s):

Charles Engel

John H. Rogers

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226260228.003.0007

The failure of the law of one price has been a puzzle for economists at least since Peter Isard's classic 1977 study. A related question in international trade has concerned the degree to which markets have become regionalized. This chapter explores whether price variability is smaller within regions than between regions, focusing on the roles of geography versus currencies. By looking at data on consumer prices, it argues that locations within a region share a unified distribution system for final goods. It first reviews some of the standard explanations for the failure of the law of one price, and then discusses how market segmentation and price discrimination can lead to failures, along with the role of sticky nominal prices. It also presents data on goods prices and examines the regressions relating price dispersion to distance and other geographic factors, variations in exchange rates, measures of trade barriers, and regional variables.

Keywords:   one price, currencies, geography, price variability, consumer prices, market segmentation, price discrimination, nominal prices, exchange rates, trade barriers

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