Not a Zero-Sum Game - Ludwig von Mises Institute

different in each place. Although this is a necessary condition, it
is not sufficient because the price difference must be large
enough to compensate for transportation and other transaction
costs.
It is price relationships that reveal to us opportunity costs.
When we say price relationships are different, what we are in
effect saying is that the opportunity costs of the parties involved
are different. The following example shows how different relative
price structures create profitable opportunities for trade. As will
be seen below, intermediation (arbitrage between currencies)
tends to reduce the discrepancies between exchange rates. This
should not surprise us because relative prices allow us to compare
the opportunity cost of having one thing instead of another.
TABLE I Prices without trade
country A uses currency $ country B uses currency Y
exchange rates are expressed as purchasing power parity (PPP)
As we can see, the prices have a different relationship in country A
and in country B:
relative prices
country A 1.5: 1
country B 1.2: 1