Below is the online discussion topic needs a proper and small reply


Below is the online discussion topic needs a proper and small reply for below discussion

The law of one price is a concept that aims to eliminate price differences for the same product produced in different countries through trade flows, market arbitrage and inventory adjustments. It takes into account transaction and transportation costs. Arbitrage refers to the practice of buying and selling the same asset or bond to make a profit. When one buys a commodity and sells it in another country, profit is made by the disappearance of the price difference. However, factors such as transportation costs and trade barriers can weaken the price link and lead to price differences. When the price differential is greater than transportation costs, traders engage in arbitrage to increase supply and lower prices. Conversely, when the price differential is less than transportation costs, traders reduce transportation demand, leading to higher prices. Inventory adjustments also affect prices by releasing or withholding inventory based on expected shipments. In summary, while the law of one price works to eliminate price differentials, realities in the marketplace can have an impact on it. (The law of one price)

Both PPP and the law of one price are used to determine the equilibrium price of a good in different markets. PPP is based on the Law of One Price, which implies that all identical goods should have the same price. It is usually calculated using a similar basket of goods in two countries and is also used to evaluate under-/overvalued currencies. The law of one price is an economic theory that explains why the prices of commodities, assets and securities remain the same across markets, regardless of exchange rate. When the law of one price plays out correctly, the result is purchasing power parity.

For the Chinese currency, the price of a Big Mac is 21.70 yuan and for US dollars, the price of a Big Mac is 5.15 USD. On May 20 the exchange rate is 7.01 yuan to the US dollar. According to the big mac index, since Big Mac is a standardized commodity available in every country, it is converted into currency by comparing the Big Mac index by country (2023, Big Mac index by country), so the implied exchange rate of the Big Mac index is one US dollar equals 3.36 Chinese yuan, which is equivalent to when the price of a Big Mac in the US is 6.46 USD, it sells for 21.7 in Chinese, so the Chinese yuan is overvalue

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