Using Apple Products to Evaluate the Law of One Price and Exchange Rate Passthrough

Working Paper 901

Abstract

We construct a novel dataset focused on Apple product prices to assess the adherence of different price measures to the law of one price (LOP) and purchasing power parity (PPP), along with their convergence properties following deviations. We first apply static estimation techniques, including panel and Bayesian methods, to evaluate the overall conformity to LOP and PPP across the entire dataset. Then, dynamic models are employed to assess the speed of price and exchange rate convergence over time. In particular, we examine half-lives of deviations to quantify the adjustment process. Our findings show that Apple product prices exhibit stronger adherence to LOP compared to traditional price measures, such as the Big Mac Index or the Consumer Price Index (CPI). Deviations from LOP for Apple products last only a few months, and transaction costs are identified as a primary driver of non-adherence. These results highlight the advantages of using homogeneous, globally traded goods such as Apple products in examining real exchange rate dynamics.