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Not a Zero-Sum Game - Ludwig von Mises Institute

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different in each place. Although this is a necessary condition, it<br />

is not sufficient because the price difference must be large<br />

enough to compensate for transportation and other transaction<br />

costs.<br />

It is price relationships that reveal to us opportunity costs.<br />

When we say price relationships are different, what we are in<br />

effect saying is that the opportunity costs of the parties involved<br />

are different. The following example shows how different relative<br />

price structures create profitable opportunities for trade. As will<br />

be seen below, intermediation (arbitrage between currencies)<br />

tends to reduce the discrepancies between exchange rates. This<br />

should not surprise us because relative prices allow us to compare<br />

the opportunity cost of having one thing instead of another.<br />

TABLE I Prices without trade<br />

country A uses currency $ country B uses currency Y<br />

exchange rates are expressed as purchasing power parity (PPP)<br />

As we can see, the prices have a different relationship in country A<br />

and in country B:<br />

relative prices<br />

country A 1.5: 1<br />

country B 1.2: 1

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