Select the correct code of the following statements being correct or incorrect. Statement (I) : The ‘law of one price’ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. Statement (II) : An ‘Efficient market’ has no impediments to the free flow of goods and services, such as trade barriers.
Both statements (I) and (II) are correct.
Analyzing Statements on Law of One Price and Efficient Markets
The question asks us to evaluate the correctness of two statements related to international economics and market concepts: the 'law of one price' and 'efficient markets'. Let's examine each statement individually.
Statement (I): The ‘law of one price’ Definition
Statement (I) defines the 'law of one price'. It says that in competitive markets where there are no transportation costs and no barriers to trade, identical products sold in different countries should have the same price when their prices are converted into the same currency. This is the standard and widely accepted definition of the 'law of one price'. It is a fundamental concept in international economics and finance, suggesting that arbitrage opportunities would quickly be eliminated in such ideal conditions, leading to price convergence for identical goods across borders.
Therefore, Statement (I) correctly describes the 'law of one price' under its assumed conditions.
Statement (II): Efficient Markets and Trade Barriers
Statement (II) describes an 'Efficient market' as one with no impediments to the free flow of goods and services, such as trade barriers. In the context of international trade, an efficient market is often characterized by the absence of factors that hinder trade and economic transactions. Trade barriers, like tariffs, quotas, or complex regulations, are significant impediments to the free flow of goods and services between countries. A market that is efficient in the sense of facilitating trade would logically be free of such barriers, allowing goods and services to move freely based on supply and demand.
Therefore, Statement (II) provides a relevant characteristic of an efficient market from the perspective of international trade and the flow of goods and services.
Conclusion on Statement Correctness
Based on the analysis:
- Statement (I) accurately defines the 'law of one price' under specific conditions.
- Statement (II) describes a key characteristic of an 'efficient market' related to the absence of trade barriers.
Both statements are considered correct within their respective economic contexts as presented.
Determining the Correct Option
Since both Statement (I) and Statement (II) are correct, we look for the option that reflects this conclusion.
- Option 1: Statement (I) is correct but (II) is incorrect. (Incorrect)
- Option 2: Statement (II) is correct but (I) is incorrect. (Incorrect)
- Option 3: Both statements (I) and (II) are correct. (Correct)
- Option 4: Both statements (I) and (II) are incorrect. (Incorrect)
The correct option is the one stating that both statements (I) and (II) are correct.
| Statement | Concept | Analysis | Correctness |
|---|---|---|---|
| (I) | Law of One Price | Definition matches standard economic theory under ideal conditions (no transport costs, no barriers, competitive markets). | Correct |
| (II) | Efficient Market (Trade Context) | Absence of impediments like trade barriers is a characteristic promoting efficiency in the flow of goods and services. | Correct |
Revision Table: Law of One Price and Efficient Markets
| Concept | Key Idea | Assumptions | Relation to Trade |
|---|---|---|---|
| Law of One Price | Identical goods, same price in common currency across locations. | Competitive markets, zero transport costs, zero trade barriers, identical goods. | Predicts price convergence across borders under ideal free trade conditions. |
| Efficient Market (Trade) | Facilitates free flow of goods and services. | Absence of significant frictions, e.g., no trade barriers, low transaction costs. | Allows prices to reflect true supply and demand, closer to Law of One Price ideal. |
Additional Information: Related Concepts
Purchasing Power Parity (PPP)
The 'law of one price' is the basis for the theory of Purchasing Power Parity (PPP). Absolute PPP suggests that exchange rates should adjust so that a basket of identical goods costs the same in different countries when expressed in the same currency. PPP is essentially the 'law of one price' applied to a basket of goods and services rather than a single product. Deviations from PPP can occur due to real-world factors like transportation costs, trade barriers, and non-tradable goods.
Types of Trade Barriers
Trade barriers are obstacles that restrict the flow of goods and services between countries. They can be:
- Tariffs: Taxes on imported goods.
- Quotas: Limits on the quantity of goods that can be imported.
- Non-tariff barriers: Regulations, standards, licensing requirements, customs procedures, subsidies, etc., that make imports more difficult or costly.
These barriers create inefficiencies in the market by distorting prices and reducing the volume of trade, preventing the conditions required for the 'law of one price' to hold perfectly and making markets less 'efficient' in facilitating free trade.
Important Questions from Business Competition
Which one of the following is not true for introducing multiple brands in a category?
The shut down refers to complete cessation or closing down of the business. It involves which of the following?
i) No buying or selling
ii) No manufacturing
iii) Shifting of business from one place to another place
iv) Assets to be sold or disposed off
v) Returning capital to owners
Which of the following is a guideline to deal with colleagues?
Which of the following is a horizontal agreement?
- In case of anti-competitive activities by a firm, the Competition Commission of India can impose a penalty which shall be not more than
