No. 55 Price transmission in food markets

Year of publication2023

AuthorFAO

PublisherFAO

AbstractThis policy brief assesses whether domestic food markets in developing countries respond to changes in international prices and how fast. Price transmission – namely the extent to which changes in international food prices lead to changes in local food prices – is central to assessing the functioning of markets. The Law of One Price suggests that price transmission is complete, with the prices of a food product sold on competitive foreign and domestic markets differing only by transportation costs. Such a complete price pass-through is attained by trade. Changes in supply and demand in one country affect prices, which will in turn instigate trade with other countries. As trade restores the market equilibrium, prices in the domestic market tend to equalize with those in foreign markets except for transport costs - hence the term “Law of One Price”. Markets are important channels for economic integration, but they can also transmit shocks. In this respect, the policy brief shows that high import dependence and a liberalized trade regime are associated with faster price transmission. By contrast, countries experience a more incomplete pass-through of changes in international prices when trade costs are comparatively higher and trade policies are more restrictive. Finally, the analysis in this policy brief also suggest that when countries are import dependent and domestic markets are less integrated with international markets, consumers prices are generally much higher than world prices.

 

Product typeJournal; magazine; bulletin

SeriesTrade Policy Briefs

ISSNISSN 2707-2290

Areas of workTrade Policy and Partnerships

Keywordsfoods; domestic markets; world markets; prices; trade policies; international trade; capacity development