Exchange Rates and the Law of one Price

–          Simply put, this law states that the same thing cannot sell for different prices at the same time.

–          Exchange rates portray relationships in wealth exchanges across national borders in much the same manner as interest rates portray wealth exchanges across time. They generate the expectation of purchasing power parity across countries.

–          Some frictions to purchasing power equilibrium include; transaction and information costs, as well as positive and negative impediments to free trade imposed by governments.