What it means
Imagine the same new device sold in two countries: if a trader can purchase it cheaply abroad, ship it legally and sell it at home for more than all costs, that opportunity may attract competitors whose buying and selling can narrow the gap. The mechanism depends on genuine identity of goods and a realistic ability to trade at the quoted prices and volume.
An IMF explanation distinguishes the law of one price for individual homogeneous goods from purchasing power parity for wider price levels, and it states the ideal result when there are no transaction costs or trade barriers. For business decisions, explicitly add the real frictions to the comparison rather than claim the theoretical equality must hold in practice.
Convert currency in the correct direction, so if one US dollar buys a stated number of dirhams, multiply a dollar price by that rate to obtain a dirham comparison. An exchange quote can change and a business may pay a bank spread rather than an interbank headline rate, so use the executable rate on the actual settlement date for a real trade, not an illustrative textbook conversion.
Transport, insurance, duties, compliance, storage and financing can eliminate an apparent spread, and a small shipment may have high unit costs. Import restrictions or exclusive distribution agreements can prevent lawful resale.
Warranty eligibility, voltage, packaging or model number can make products that look identical economically different, so check whether quoted prices include tax and after-sales service. Prices can differ for non-tradable services, since a haircut in one city cannot simply be bought and shipped to another and housing rents reflect local land and regulation.
A broad consumer basket therefore contains many items that cannot be arbitraged directly, so purchasing power parity based on baskets is related to, but not identical to, one-price comparisons of particular tradable goods. Even for tradable goods arbitrage may be delayed, because sellers can run promotions, inventory may be scarce, and buyers may face payment or customs delays.
Prices observed at different times should not be presented as simultaneous opportunities, so record dates, model specifications and fees. A retailer can use the benchmark when deciding whether to import directly by comparing landed cost with the local wholesale offer, then including the value of warranty, lead time and reliable supply.
A positive arithmetic gap before these items is not guaranteed profit, and if reselling violates contracts or law, the apparent opportunity is not an acceptable business plan. A gap can inform sourcing negotiations but does not prove unfair pricing, so ask for a like-for-like delivered quote.
For owners, the law of one price is a disciplined question: why are equivalent goods priced differently after a consistent currency conversion? The answer may be a temporary trading opportunity, or it may be a legitimate cost or barrier that explains the difference.
In practice
Real-world examples.
Example
A trader compares the same product in two countries after converting currency and including import costs.
Example
A buyer finds the foreign model has a different warranty, so the shelf prices are not directly comparable.
Example
A supplier reviews a cross-border price difference that disappears once shipping and duties are added.
Formula
Calculation
Illustrative landed-price gap = Local comparable selling price - (Foreign purchase price x Domestic currency per foreign unit + Transport + Duties + Other transaction costs)
Worked example. A fictional item costs USD 100, using an illustrative AED 3.67 per USD. Transport and applicable duties total AED 40, and a comparable local price is AED 450.
- Converted purchase = AED 367; illustrative landed cost = AED 407.
- Price gap before other costs = AED 450 - AED 407 = AED 43.
The gap is not profit; actual rates, taxes, resale rights and further costs must be checked.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Bay Trading, an invented retailer noticing a cheaper overseas listing for a device. Its initial spreadsheet showed a large dirham price difference. The buyer verified the model, shipping quote, warranty rights, duties and available quantity.
After including those items, the remaining margin was too small for its risk target, so it kept its current source. This is not an actual exchange-rate or import-duty quote. The lesson is to test the theoretical gap against a legally executable transaction.
Watch out
Common mistakes.
- Comparing different products or tax-inclusive and tax-exclusive prices as identical.
- Treating a converted shelf-price difference as risk-free arbitrage profit.
- Using a stale exchange rate or omitting shipping, duties and warranty differences.
Questions
People also ask.
Does the law require retailers to charge the same price?
No. It describes an economic tendency under restrictive assumptions.
Is it the same as purchasing power parity?
No. This concerns an individual identical good; PPP concerns broader price levels or baskets.
Why can gaps persist?
Trade barriers, transaction costs, product differences and limited resale can prevent convergence.
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