The law of one price is a theory which states that the price of any given product or service should be identical regardless of where the product is purchased and that currency exchange rates will adjust accordingly.
Suppose a budget car were to cost 10,000 Swiss francs in Switzerland and 7000 euros in Germany. If currency rate adjustments were based on the price of this product, the CHF to EUR rate would be CHF 1 to EUR 0.70 to match their purchasing power.
The law of one price theory assumes that if a product or service is available for a lower price in another location, consumers will purchase it in that location. The increased demand in the cheaper location would raise the price of the product in that location while the diminished demand in the more expensive location would lower the price of that location until the prices in both locations match.
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