Felipe Morandé

Domestic prices of importable goods in Chile and the law of one price 1975-1982

Abstract This paper tries to explain observed deviations from the law of one price in Chile during the 1975–1982 period. In order to do this, we develop a microeconomic model where typical final goods are non-tradeable, and are produced by combining tradeable (importable) goods and commercial (or intermediation) services. The empirical results reported later in the paper tend to support our model and are consistent with the hypothesis that an important proportion of variations in retail and wholesale prices of selected imported goods is explained by changes in the cost of domestic distribution. A very important implication of our findings is that it would not make sense to invoke disaggregated perfect commodity arbitrage to support the assumption of purchasing power parity at the macro level.