Describe what the “law of one price” implies and the theory behind it. What are the arguments for why it should hold, and what are the arguments against? What have empirical studies found, does it hold?
The Excelfile received together with this instruction contains information about the price of the Bookcase BILLY from Ikea in 20 different countries. Complement this data set with exchange rates for January or February 2018 (exact date is not important for the purpose of this assignment). Calculate the BILLY Index as a replica of the Big Mac index and present the results. Does the “law of one price” hold? If not, why doesn’t it?
