Tests of the Goods Market Integration Hypothesis: Note

Abstract

Proponents of a monetary approach to the balance of payments often adopt the concept of an integrated goods market with a single world price in their monetary models. They argue that any differences in the prices of identical commodities in the international goods market would be eliminated through international arbitrage by profit-maximizing traders. Although they acknowledge that the presence of trade barriers (e.g., tariffs and transportation costs) and the lack of substitutability between traded and nontraded goods would limit the extent of full integration in the theoretical model, their empirical analysis on the available data generally supports the integration hypothesis. The empirical procedure that has been adopted is to compare changes in consumer price indices across countries with changes in those indices across cities within a country. City data are used as a benchmark because it is generally accepted that the goods market is integrated within a country. The studies by Genberg [3, 4] and Alberro [1] have shown that the international goods market is at least as well integrated as the interurban market within the United States. Lawrence [6] used the same method of comparison in criticizing Genberg's methods and conclusions. In this article we follow the procedure adopted by these authors in that comparisons are made between international markets and interregional markets during a period of fixed exchange rates. Our analysis differs from previous studies in the assumptions made about the process which generates the price data.