The Benefits of Price Convergence

Price divergence is readily apparent to anyone who shops. Travelers from Manchester to London, or from Chicago to Paris, are hit by sticker shock. Products ranging from London Fog raincoats to Viagra are available over the Internet at half their retail store prices. Common experience tells us that prices for identical products differ between countries, between cities, even between neighboring shops. On the other hand, common experience also tells us that open markets and greater competition will force a degree of price convergence, if not identical prices.

This monograph presents speculative calculations that illustrate potential benefits from price convergence between countries. The authors take a fresh look at global economic integration by examining existing price divergence, and possible price convergence, across a range of consumer goods and then calculate the potential benefits of price convergence on a country-by-country basis and for the world as a whole. This study examines the potential benefits from price convergence resulting from more competition

Preface

ix

Acknowledgments

xi

Executive Summary

1

(2)

Introduction

3

(14)

The Law of One Price and Its Limits

17

(10)

Literature Survey

17

(6)

Trade, Direct Foreign Investment, and Price Convergence

23

(1)

Lower Barriers, Better Technology, More Convergence

24

(3)

The Broad World Price Band

27

(10)

Appropriate Exchange Rates

32

(5)

Potential Static Benefits: Methodology

37

(2)

Calculation of Benefits Country by Country

39

(6)

Benefits Caculated Starting with Market Exchange Rates

39

(2)

Benefits Calculated Starting with PPP Exchange Rates

41

(1)

Additional Calculations

42

(3)

Implied Imports and Exports

45

(2)

Future Research: Mapping Policy Choices to Price Convergence

47

(4)

Concluding Observations

51

(4)

Appendix A World Price Bands

55

(20)

Appendix B Static Benefits from Price Convergence

75

(14)

Appendix C The Exchange Rate Wedge and the Exchange Rate System

89

(4)

Appendix D An Alternative Calculation of the Benefits of Price Convergence in Both Tradable and Service Sectors

93

(6)

References

99

(4)

Index

103

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The Benefits of Price Convergence

Summary

Table of Contents

Supplemental Materials