When there are no trade costs, which of the following conditions exist? I. There is no arbitrage.
II) The law of one price (LOOP) is operational.
III) The real exchange rate is equal to one.
A) I
B) II
C) I and II
D) II and III

Question

Quizplus · Accepted Answer

When there are no trade costs, the law of one price (LOOP) is operational, meaning identical goods should sell for the same price in different markets when prices are expressed in a common currency. Additionally, the real exchange rate equals one, as the price levels between two countries would be the same when there are no trade costs, making the value of goods equivalent across borders.

When There Are No Trade Costs, Which of the Following