One of David Ricardo’s foundational assertions was the law of one price. That tradeable goods will cost the same, when their transport costs are included, in different places. The insight being that if they weren’t then people would buy in one, sell in the other, thereby equalising prices. A reasonable corollary to this idea is that exchange rates should move based upon purchasing parity or interest rate parity. The second is because people can move their money, just like anything else, to arbitrage between prices – here, the interest rate. The other because, well, that’s what arbitrage will do, equalise those PPP exchange rates. Not wholly, not perfectly, but roughly enough.
Tim Worstall, “Ricardo Still Right 201 Years Later”, Continental Telegraph, 2018-11-01.
