The law of one price: a test based on prices for selected inputs in New Zealand agriculture
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The law of one price (LOOP) is an essential foundation of both the pure theory of trade and monetary theory.
Strictly speaking, the law relates to prices of individual commodities. However, empirical tests of LOOP have often
relied on aggregated data. In this paper, a model is derived and estimated using price data for 15 selected inputs in
New Zealand agriculture. The results offer no support for the LOOP in the short run, and the results for the long
run are mixed. It may be inappropriate, therefore, to assume that the LOOP holds generally in modelling exercises,
particularly when models are used for policy purposes.