MGEC61H3 Chapter Notes - Chapter 5: Gustav Cassel

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Chapter 5(16) price levels and the exchange rate in the long run. States that in competitive markets free of transportation costs and official barriers to trade (ie. tarrifs), identical goods sold in different countries must sell for the same price when their pries are expressed in the same currency. E(dc/fc) = pi (dc) = e(dc/fc) x pi (dc) / pi (fc) (fc) Basic idea was put forth in the writings of 19-th century british economists (incl. Popularized by gustav cassel, a swedish 20-th century economist. Cassel made it the centrepiece of a theory of exchange rates. Difference between ppp and the law of one price: The law of one price applies to individual commodities, such as commodity i. Ppp applies to the general price level, which is a composite of the prices of all the commodities that enter into the reference basket.

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