ABSTRACT
Professor Officer takes a fresh look at the Law of One Price (LOP) in his paper, “The Law of One Price: Two Levels of Aggregation.” The motivations are first, a new data set that was in essence designed to examine international LOP and second, a new methodology for testing LOP that he believes is superior to current methods. The paper has two objectives: first, to test whether LOP holds at various levels of commodity disaggregation of the data and second, to examine whether the forces causing deviations from LOP are primarily macro or micro in nature. The paper concludes that the LOP tested with aggregate data is more likely to hold between countries of similar macroeconomic characteristics such as per capita GNP. Microeconomic issues such as market structure appear to be important when testing for whether LOP holds using disaggregate data but not important when testing LOP with aggregate data.
