The Law of One Food Price

Are food prices more or less equalised across countries? In view of obvious barriers to trade (both naturally occurring and of a man-made nature) and currency gyrations, the answer would seem to be an unambiguous “No”, but we show this question is worthy of further investigation. In order for the law of one price (LOP) to hold, domestic prices must respond one-for-one to changes in world prices and exchange rates, but this is usually prevented by variations in mark-ups and/or trade barriers. We use data on consumer prices from the International Comparison Program and producer prices from the Food and Agriculture Organization to test for the LOP for food. While not completely conclusive, these tests show the various market wedges appear to be insufficiently important to prevent food prices to equalise over the longer term.