According to economic theory, the price of a commodity in one country should also be the same in other countries. For this to be possible, this theory assumes that all other factors should be kept constant. In other words, the assumptions include having no transaction costs, no transportation costs, no legal restrictions, same currency exchange rates, and no price manipulation by buyers or sellers. This theory is also known as the law of one price.
But in real life, all these assumptions are not possible to be followed. It is often seen that prices of all goods vary across the world. No commodity has the same price all over the world. This is because all countries have different rules and systems. However, different countries having different policies is not the only reason for goods having different prices around the world. There are various other reasons too. Let us take a look at the factors why the same good is sold at different prices around the world.
Perceived Value
The perceived value refers to the evaluation of the product or service by the consumers. While evaluating the product, consumers generally look at the advantages of the particular product or service, and its ability to meet their needs and expectations, compared to the alternatives of that product. Perceived value is measured by the price the public is willing to pay for a particular product or service.
Prices of many items like gadgets and vehicles are not always determined based on the cost of producing them. A product may have a higher perceived value in one country compared to another country. A cheap brand in one country may be considered a reputed brand in another country. For this reason, hiring employees and setting up franchises will not cost the same in all countries because of different perceived values.
Transportation Costs
Transportation costs refer to the costs incurred by the seller when it transfers its product to another location, for the purpose of selling. If the selling company is delivering the product themselves, they will often pass down the transportation costs to the customer.
Different countries will charge different prices for transporting the particular product. This will lead to a different price for the end customer. Other costs like wages to workers will also vary depending on the country where the business is selling the product.
Transaction Costs
Transaction costs refer to the costs incurred by the seller when buying or selling a particular product or service. These costs include the payments that banks and brokers receive for their help in facilitating the transactions of the goods.
Due to transaction costs, the prices of the commodities also get affected in different countries. If transaction costs are high, the price for the commodity will also rise. If transaction costs are lower, the price of the commodity will be lower.
Legal Restrictions
Legal restrictions refer to the limitation of various activities issued by the government. Some governments may discourage the sale of a particular product in their country which results in the price of the product going up, due to more demand and less supply. Other forms of restrictions include immigration restrictions, license restrictions, etc.
Market Structure
Market structure refers to how different industries are classified and differentiated based on the types of goods they sell and the way their operations are affected by external factors and elements.
Different countries have different market structures. The number of buyers and sellers varies between different markets. This results in varying abilities of different sellers to charge prices.
Taxes and Import Duties
The difference in taxes and import duties among various countries is one of the major factors that affect the prices of goods. Some countries have high import duty charges, while some countries have low charges. Local taxes also make a big difference regarding the final price to be paid by the customer. Subsidies, sales taxes, and value-added taxes also make a big difference in the determination of the final price to be paid by the customer.
Takeaway
According to the economic theory known as the law of one price, the price for a particular commodity should be the same when sold in different countries of the world. However, this is not possible to happen because of various factors. In the end, the various charges by the government of a country decide the prices paid by their citizens. If the country asks for a less rate of tax and other charges, the citizens have to pay less for the product. If the charges are more, the price is also more. Although high price differences are helpful to many companies and governments to earn profits, in the end, it is the end consumer who has to bear the high taxes and the high prices for the same good that is sold at a cheaper price in another country.
